<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 30, 1998
REGISTRATION NO. 333-58447
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
uBID, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
<TABLE>
<S> <C> <C>
DELAWARE 5961 33-0775328
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
2525 BUSSE ROAD
ELK GROVE VILLAGE, ILLINOIS 60007
(847) 860-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
GREGORY K. JONES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
uBID, INC.
2525 BUSSE ROAD
ELK GROVE VILLAGE, ILLINOIS 60007
(847) 860-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
ROBERT M. MATTSON, JR., ESQ. GREGORY K. MILLER, ESQ.
KRISTINA M. JODIS, ESQ. ANDREW S. WILLIAMSON, ESQ.
MORRISON & FOERSTER LLP LATHAM & WATKINS
19900 MACARTHUR BOULEVARD 505 MONTGOMERY STREET, SUITE 1900
IRVINE, CALIFORNIA 92612-2445 SAN FRANCISCO, CALIFORNIA 94111
(949) 251-7500 (PHONE) (415) 391-0600 (PHONE)
(949) 251-0900 (FAX) (415) 395-8095 (FAX)
</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. [_]
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 SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 30, 1998
PROSPECTUS
- ----------
1,580,000 SHARES
[LOGO OF uBID APPEARS HERE]
COMMON STOCK
----------
All of the 1,580,000 shares of Common Stock, par value $.001 per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by uBid, Inc.
("uBid" or the "Company"). Prior to the Offering, there has been no public
market for the Common Stock. It is currently estimated that the initial public
offering price will be between $13.00 and $14.00 per share. For a discussion
relating to factors to be considered in determining the initial public offering
price, see "Underwriting."
Shares of Common Stock may be reserved for sale at the initial public
offering price to the Company's employees, directors and other persons with
relationships with the Company. Such employees, directors and other persons may
purchase, in the aggregate, not more than 10% of the Common Stock offered
hereby. See "Underwriting."
The Company has been approved for listing of the Common Stock on the Nasdaq
National Market under the symbol "UBID," subject to official notice of
issuance.
The Company is currently a wholly-owned subsidiary of Creative Computers,
Inc. (the "Parent"). Upon completion of the Offering, the Parent will own
approximately 82.3% of the outstanding shares of Common Stock (80.1% if the
Underwriters exercise their over-allotment option in full). The Parent has
announced its intention, subject to satisfaction of certain conditions, to
divest its ownership interest in the Company in 1999 by means of a tax-free
distribution to its stockholders but in no event prior to 180 days after
consummation of the Offering. Only holders of the common stock of the Parent
will receive shares of Common Stock in the tax-free distribution. Such
distribution may adversely affect the market price of the Common Stock. See
"Risk Factors," "Separation from the Parent" and "Certain Transactions."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
===================================================================================
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $ $ $
- -----------------------------------------------------------------------------------
Total (3)........................ $ $ $
===================================================================================
</TABLE>
(1) The Company and the Parent have agreed to indemnify the several
Underwriters against certain liabilities, including certain liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1 million.
(3) The Company has granted the Underwriters an option to purchase up to an
additional 237,000 shares of Common Stock exercisable within 30 days after
the date hereof, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriting."
----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
----------
MERRILL LYNCH & CO. WILLIAM BLAIR & COMPANY
----------
The date of this Prospectus is , 1998.
<PAGE>
INNOVATION IN eCOMMERCE
uBID is a live Internet
[uBID logo] auction house where
businesses and consumers
set the price on and
compete to win excess,
refurbished, and limited
merchandise through live-
action bidding. To keep
the excitement level high,
uBID (www.ubid.com) has
continuously-evolving
product offerings and
closes a multi-product
auction every day of the
week.
NUMEROUS VENDOR
RELATIONSHIPS
uBID entered the
electronic commerce
industry to be a leader in
the exciting frontier of
the online auction sales
format. uBID has developed
relationships with over
100 vendors and
manufacturers of computer,
consumer electronics and
home and leisure products,
from whom we acquire our
inventory.
POSITIVE CUSTOMER EXPERIENCE
uBID'S hallmark is making
sure customers get the
personalized care they
deserve. With a 100,000
square-foot advanced
shipping and configuration
facility, customers
receive their orders
[Color photo of uBID Website home quickly and accurately. If
page] a customer ever does have
www.uBID.com a concern, TOLL-FREE
customer support is
available from a
professional,
knowledgeable staff.
uBID/SM/ IS THE REGISTERED SERVICE MARK OF uBID, INC. THIS PROSPECTUS ALSO
INCLUDES REGISTERED SERVICE MARKS AND/OR TRADEMARKS OF OTHER ENTITIES.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all share and per
share data and information in this Prospectus (i) gives retroactive effect to
the 100,000-for-one split of the Common Stock effected in June 1998, (ii)
assumes a reverse split of approximately 0.73298-for-one of the Company's
Common Stock that, subject to adjustment, will be effected prior to the
Offering Closing Date and (iii) assumes no exercise of the Underwriters' over-
allotment option. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors."
THE COMPANY
uBid operates an online auction for excess merchandise, offering close-out
and refurbished products to consumers and small to medium-sized businesses. The
Company believes that its online auction represents an exciting sales format
for users that leverages the interactive nature of the Internet. The Company's
Internet auctions feature a rotating selection of brand name computer, consumer
electronics and home and leisure products which typically sell at significant
discounts to prices found at traditional retailers. uBid currently runs
auctions seven days a week, offering on the average over 1,000 total items in
each of its auctions. From its first auction in December 1997 through September
30, 1998, the Company auctioned over 138,000 merchandise units, registered over
120,000 users and recorded more than eight million visits to its Website. In
the month of September alone, the Company auctioned approximately 38,000
merchandise units, registered over 21,000 users and recorded approximately 1.9
million visits to its Website.
The Company's net revenues grew from $157,000 in the month of January 1998 to
$5.8 million in September 1998 and $24.1 million for the nine months ended
September 30, 1998. The Company had a net loss of approximately $3.0 million
and an accumulated deficit of approximately $3.3 million for the nine months
ended September 30, 1998 and as of September 30, 1998, respectively.
The Company operates in the rapidly growing Internet commerce industry.
Jupiter Communications estimates that U.S. retail consumer purchases of goods
and services over the Internet will increase from $2.6 billion in 1997 to $37.5
billion in 2002. The single largest online retail category in the U.S. is
projected to be computers and consumer electronics, which is forecast to grow
from $836 million in 1997 to $10.5 billion by the year 2002. The personal
computer and consumer electronics markets are characterized by significant
quantities of excess merchandise due to extremely short product life cycles and
the prevalence of returned items through the consumer retail channel. Because
of the highly fragmented and relatively undeveloped liquidator channel, prices
received by vendors for excess goods tend to be highly variable. The Company
estimates that the value of such products exceeded $4 billion in 1997 in the
U.S. alone.
uBid's online auctions provide an ideal distribution channel for
unpredictable, odd-lot quantities of close-out and refurbished goods. The
frequency of the Company's auctions and its ability to continuously add new
items allow vendors to dispose of inventory quickly to minimize the risk of
price erosion. Online sales also allow vendors to liquidate excess merchandise
directly to a nationwide audience, without cannibalizing their primary
distribution channels. Furthermore, uBid offers customers a unique retail
experience--the opportunity to set their own prices on popular, brand name
products with the convenience of shopping 24 hours a day, seven days a week.
The element of gamesmanship, combined with an ever-changing merchandise mix,
entices customers to participate in the auction in hopes of "hitting the
jackpot" and winning a bargain.
The Company employs sophisticated merchandising techniques to manage the
auction process, which allows the Company to maximize revenues on products put
into auction. uBid's sophisticated auction management methodology capitalizes
on the Company's direct marketing and merchandising expertise to help predict
the level of customer traffic to the Website, the appropriate product mix of
each auction and the ultimate price realized on each product.
3
<PAGE>
The Company has designed its online auctions to offer a superior customer
experience and to encourage repeat visits by customers and potential customers.
The Company believes it offers a consistently superior experience to its
customers through an entertaining and fast auction process, tight control of
the order process and a high level of customer support. Approximately 90% of
the products shipped from the Company's warehouse are shipped the next business
day after an auction closes. In addition, uBid has established multiple
channels for communicating with customers before and after the sale, including
telephone, e-mail and online support. The Company has also incorporated other
features to encourage repeat visits, including a personalized page with a
user's bidding history. Repeat customers accounted for approximately 68% of
customer orders for the three months ended September 30, 1998.
In the electronic commerce industry, a strong brand is critical to creating a
high level of vendor awareness and attracting customer traffic. Accordingly,
the Company's strategy is to aggressively increase its visibility and brand
recognition through a variety of marketing and promotional efforts.
Specifically, the Company intends to increase points of access by establishing
relationships with other online companies similar to its existing relationships
with America Online, Inc. ("AOL"), CNET, Inc. ("CNET") and Wired Digital, Inc.
("Wired Digital").
The Company obtains merchandise directly from computer, consumer electronics
and home and leisure products manufacturers and indirectly through other
vendors, such as retailers and distributors. Currently, this merchandise is
sourced from over 100 vendors. uBid's merchandise has included brands such as
AST, AT&T, Aiwa, Apple, Canon, Casio, Compaq, Dell, Gateway, Hewlett-Packard,
IBM, JVC, Lexmark, Micron, NEC, Panasonic, Seagate, Sony, Toshiba and Uniden.
The Company is currently a wholly-owned, indirect subsidiary of the Parent.
The Company is a Delaware corporation with its principal executive offices
located at 2525 Busse Road, Elk Grove Village, IL 60007, and its telephone
number at that address is (847) 860-5000. The Company maintains a Website at
www.ubid.com. The information contained in the Company's Website is not, and
shall not be deemed to be, a part of this Prospectus.
SEPARATION FROM THE PARENT
In June 1998, the Parent announced its intention to separate the Internet
auction business of the Company and the associated assets and liabilities of
such Internet auction business and operations from the Parent's other
businesses and operations (the "Separation"). The Parent also announced its
intention to consummate the Offering and to complete the Separation by the
distribution to the Parent's stockholders in no event prior to 180 days after
consummation of the Offering, subject to certain conditions and consents, of
all of the Parent's remaining interest in the Company (the "Distribution"). For
a period from the Offering Closing Date until three years from the date of the
Distribution, the Company will be subject to restrictions on its ability to
issue additional equity securities (but not debt securities), and these
restrictions may impede the ability of the Company to raise necessary capital
or to complete acquisitions using its equity securities. See "Risk Factors--Tax
Indemnification Obligation; Limitations on Issuances of Equity Securities
Following the Distribution" and "--Limited Ability to Issue Common Stock Prior
to Distribution" and "Separation from the Parent--Conditions to the
Distribution."
The Company and the Parent have entered into or will enter into, on or prior
to the consummation of the Offering, certain agreements providing for the
Separation and Distribution and governing various interim and ongoing
relationships between the companies after completion of the Offering and the
Distribution, including an agreement between the Company and the Parent
providing for the purchase by the Company of certain services from the Parent.
The Company has amounts due to the Parent for working capital and fixed asset
purchases (the "Payable"), which equaled approximately $3.7 million as of
September 30, 1998. See "Separation from the Parent" and "Certain
Transactions."
On the Offering Closing Date, the Parent will own approximately 82.3% of the
outstanding shares of Common Stock (80.1% if the Underwriters exercise their
over-allotment option in full). See "Description of Capital Stock."
4
<PAGE>
THE OFFERING
Common Stock to be offered
by the Company............. 1,580,000 shares
Common Stock to be
outstanding after the
Offering................... 8,909,883 shares (1)
Use of Proceeds............. The net proceeds to be received by the Company
from the Offering will be used for working
capital, including the Company's planned
advertising and brand development expenditures
and for development of the Company's
infrastructure in order to support growth. See
"Use of Proceeds."
Nasdaq National Market
Symbol for Common Stock.... UBID
- --------
(1) Excludes employee and director stock options of the Company to purchase an
aggregate of 869,690 shares of Common Stock of the Company outstanding as
of September 30, 1998 at a weighted average exercise price of $.71 per
share. All of the options granted are exercisable only in the event of an
initial public offering or a Sale or Merger (each as defined in the option
agreement). The terms of the options provide for vesting, generally over a
five-year period, except for options to purchase 36,649 shares of Common
Stock which will vest on the Offering Closing Date. However, assuming all
options are exercised, additional dilution to new stockholders would be
approximately $.09 per share. In addition, upon completion of the
Distribution, certain stock options exercisable for shares of common
stock, par value $.001 per share, of the Parent ("Parent Common Stock")
will be converted into stock options exercisable for shares of Parent
Common Stock and Common Stock. It is not possible to specify how many
shares of Common Stock will be subject to such stock options, as it is not
known how many stock options to purchase Parent Common Stock will remain
unexercised and outstanding by the record date for the Distribution.
However, based on the number of options to purchase Parent Common Stock
outstanding on September 30, 1998, options to purchase 854,893 shares of
Parent Common Stock would become options to purchase 854,893 shares of
Parent Common Stock and 612,017 shares of Common Stock at an estimated
weighted average exercise price of $4.40 per share, based on the market
price of Parent Common Stock at September 30, 1998 ($8.25) and the
mid-point of the range of the estimated initial public offering price of
the Common Stock ($13.50). As a result of the Distribution, any options to
purchase Parent Common Stock issued after the Offering Closing Date will
not be convertible into options to purchase Common Stock.
RISK FACTORS
Purchasers of Common Stock in the Offering should carefully consider the risk
factors set forth under the caption "Risk Factors" and the other information
included in this Prospectus prior to making an investment decision. See "Risk
Factors."
5
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
Set forth below is summary historical financial and operating data of the
Company for the periods indicated, which have been derived from the Company's
audited financial statements. The summary historical financial data set forth
below should be read in conjunction with the Company's financial statements and
notes thereto included elsewhere in this Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
summary historical financial data set forth below is not necessarily indicative
of the results of operations or financial position which would have resulted
had the Offering and the Separation occurred at the beginning of each period
presented.
<TABLE>
<CAPTION>
INCEPTION THREE MONTHS THREE MONTHS THREE MONTHS NINE MONTHS
(APRIL 1, 1997) ENDED ENDED ENDED ENDED
TO DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1998 1998
---------------- ------------ --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................ $ 9 $ 2,075 $ 6,751 $ 15,299 $ 24,125
Gross profit................ 1 184 496 1,253 1,933
Loss from operations........ (287) (864) (937) (1,020) (2,821)
Net loss.................... (313) (895) (993) (1,092) (2,980)
Basic and diluted net loss
per share (1).............. $ (0.04) $ (0.12) $ (0.14) $ (0.15) $ (0.41)
Shares used to compute basic
and diluted net loss per
share (1).................. 7,329,883 7,329,883 7,329,883 7,329,883 7,329,883
<CAPTION>
DECEMBER 31,
1997 SEPTEMBER 30, 1998
---------------- ----------------------------
ACTUAL ACTUAL AS ADJUSTED (2)
---------------- ------------ ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents... $ -- $ -- $ 18,837
Working capital............. 31 (624) 18,213
Total assets................ 358 6,048 24,885
Advances from the Parent.... 670 3,709 3,709
Total stockholder's equity
(deficit).................. (312) (3,292) 15,545
</TABLE>
- --------
(1) See Notes 1 and 7 of the notes to the financial statements for an
explanation of the number of shares used in computing the amount of basic
and diluted net loss per common share.
(2) Adjusted to reflect the sale of 1,580,000 shares of the Company's Common
Stock in the Offering at an assumed initial public offering price of
$13.50 per share and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including the matters set forth in the following risk factors and
elsewhere in this Prospectus. See "--Forward-Looking Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EXTREMELY LIMITED OPERATING HISTORY
The Company was incorporated in September 1997 and began conducting auctions
on the Internet in December 1997. Prior to the incorporation of the Company,
the Parent, beginning on April 1, 1997 ("Inception"), funded certain startup
and development activities. Accordingly, there is an extremely limited
operating history upon which to base an evaluation of the Company and its
business and prospects. The Company's business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as electronic commerce.
Such risks for the Company include: an evolving and unpredictable business
model; management of growth; the Company's ability to anticipate and adapt to
a developing market; acceptance by customers of the Company's Internet
auctions and excess merchandise sold at such auctions; dependence upon the
level of auction activity; development of equal or superior Internet auctions
by competitors; dependence on vendors for merchandise; dependence on the
Parent for certain services; and the ability to identify, attract, retain and
motivate qualified personnel. To address these risks, the Company must, among
other things, continue to expand its vendor channels and buyer resources,
increase traffic to its Website, maintain its customer base and attract
significant numbers of new customers, respond to competitive developments,
implement and execute successfully its business strategy and continue to
develop and upgrade its technologies and customer services. There can be no
assurance that the Company will be successful in addressing these risks. In
addition, the Company's limited operating history prevents the use of period-
to-period comparisons of its financial results. The financial information
included herein may not necessarily provide any indication as to expected or
possible results of operations, financial condition and cash flows of the
Company in the future or what the results of operations, financial condition
and cash flows would have been had the Company been a separate, independent
entity during the periods presented. See "--Dependence of the Company on the
Parent for Certain Services" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
FUTURE CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL CAPITAL; ABSENCE OF PARENT
FUNDING
The Company's working capital requirements and cash flow provided by
operating activities can vary from quarter to quarter, depending on revenues,
operating expenses, capital expenditures and other factors. The Company
requires substantial working capital to fund its business. Since Inception,
the Company has experienced negative cash flow from operations and expects to
continue to experience significant negative cash flow from operations for the
foreseeable future. The Company currently anticipates that the net proceeds of
the Offering, together with its existing capital resources, will be sufficient
to meet the Company's capital requirements through the next 12 months,
although there can be no assurance that the Company will not have additional
capital needs prior to the end of such period. Thereafter, the Company expects
that it will be required to raise additional funds. The Company is not
currently operated as an independent company. Prior to the Offering, the
Company's needs for working capital and general corporate purposes have been
satisfied pursuant to the Parent's corporate-wide cash management policies.
However, immediately after the Offering Closing Date, the Parent will not be
required to provide funds to finance the Company's operations nor does the
Parent currently anticipate providing such funds. If the Company is unable to
obtain financing in the amounts desired and on acceptable terms, or at all,
the Company may be required to reduce significantly the scope of its presently
anticipated advertising and other expenditures, which could have a material
adverse effect on the Company's
7
<PAGE>
growth prospects and the market price of the Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICITS; ANTICIPATED LOSSES AND
NEGATIVE CASH FLOW
Since its formation, the Company has expended significant resources on its
technology, Website development, advertising, hiring of personnel and startup
costs. As a result, the Company has incurred losses since Inception and
expects to continue to incur losses for the foreseeable future. The Company
had an accumulated deficit of approximately $3.3 million at September 30,
1998. The Company intends to expend significant financial and management
resources on brand development, marketing and advertising, Website
development, strategic relationships, and technology and operating
infrastructure. Primarily as a result of the significant increase in marketing
and promotional expenses, the Company expects to incur additional losses, and
such losses are expected to increase significantly from current levels.
Because the Company has relatively low gross margins, achieving profitability
given planned investment levels depends upon the Company's ability to generate
and sustain substantially increased levels of net revenue. In addition, the
Company historically has had relatively low operating margins and plans to
continue to increase its operating expenses significantly in order to increase
its customer base, increase the size of its staff, expand its marketing
efforts to enhance its brand image, increase its visibility on other
companies' high-traffic Websites, purchase larger volumes of merchandise to be
sold at auction, increase its software development efforts, and support its
growing infrastructure. Moreover, to the extent that increases in such
operating expenses precede or are not subsequently followed by increased
revenues, the Company's business, results of operations and financial
condition will be materially adversely affected. There can be no assurance
that the Company's revenues will increase or even continue at their current
level or that the Company will achieve or maintain profitability or generate
positive cash flow from operations in future periods. The Company has made and
expects in the future to continue to make significant investments in
infrastructure and personnel in advance of levels of revenue necessary to
offset such expenditures. As a result, these expenditures are based on the
Company's operating plans and estimates of future revenues. Sales and
operating results generally depend, among other things, on the volume and
timing of orders received, which are difficult to forecast. The Company may be
unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Beginning in October 1997, the Company granted stock options to attract and
retain key employees. These options were exercisable only in the event of a
successful initial public offering or sale of the Company. Accordingly, the
Company will record a non-cash charge to compensation in the quarter in which
the Offering is consummated, calculated based upon the initial public offering
price for the Common Stock. Assuming the consummation of the Offering in
December 1998 and a $13.50 initial public offering price, the Company will
record a non-cash compensation charge of approximately $11.7 million over the
five-year vesting period of such options. Based on those options that vest
through November 16, 1998, a compensation expense of approximately $5.3
million will be recorded in the fourth quarter of 1998. See Note 5 to the
financial statements.
UNPREDICTABILITY OF, AND FLUCTUATIONS IN, OPERATING RESULTS
The Company's operating results are unpredictable and are expected to
fluctuate in the future, due to a number of factors, many of which are outside
the Company's control. These factors include: (i) the Company's ability to
significantly increase its customer base, manage its inventory mix and the mix
of products offered at auction, meet certain pricing targets, liquidate its
inventory in a timely manner, maintain gross margins and maintain customer
satisfaction; (ii) the availability and pricing of merchandise from vendors;
(iii) product obsolescence and price erosion; (iv) consumer confidence in
encrypted transactions in the Internet environment; (v) the timing, cost and
availability of advertising on other entities' Websites; (vi) the amount and
timing of costs relating to expansion of the Company's operations; (vii) the
announcement or introduction of new types of merchandise, service offerings or
customer services by the Company or its competitors; (viii) technical
difficulties with respect to consumer use of the auction format on the
Company's Website; (ix) delays in shipments as a result of computer systems
failures, strikes or other problems with the Company's delivery service or
credit card processing providers; (x) the level of merchandise returns
experienced by the Company; and
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(xi) general economic conditions and economic conditions specific to the
Internet and electronic commerce. As a strategic response to changes in the
competitive environment, the Company may from time to time make certain
service, marketing or supply decisions or acquisitions that could have a
material adverse effect on the Company's quarterly results of operations and
financial condition. The Company also expects that, in the future, it, like
other retailers, may experience seasonality in its business. Due to all of the
foregoing factors, in some future quarter the Company's operating results may
fall below the expectations of securities analysts and investors. In
such event, the trading price of the Company's Common Stock would likely be
materially adversely affected. See "--Extremely Limited Operating History" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
UNCERTAIN ACCEPTANCE OF THE uBID BRAND; EVOLVING AND UNPREDICTABLE BUSINESS
MODEL
The Company believes that the importance of brand recognition will increase
as more companies engage in commerce over the Internet. Development and
awareness of the uBid brand will depend largely on the Company's success in
increasing its customer base. If vendors do not perceive the Company as an
effective marketing and sales channel for their merchandise, or consumers do
not perceive the Company as offering an entertaining and desirable way to
purchase merchandise, the Company will be unsuccessful in promoting and
maintaining its brand. Furthermore, in order to attract and retain customers
and to promote and maintain the uBid brand in response to competitive
pressures, the Company is finding it necessary to increase its marketing and
advertising budgets and otherwise to increase substantially its financial
commitment to creating and maintaining brand loyalty among vendors and
consumers. If the Company is unable to or incurs significant expenses in an
attempt to achieve or maintain a leading position in Internet commerce or to
promote and maintain its brand, the Company's business, results of operations
and financial condition will be materially adversely affected. See "Business--
Business Strategy" and "--Sales and Marketing."
The Company expects to expand the focus of its operations beyond the auction
and sale of close-out and refurbished computer, consumer electronics and home
and leisure products to the auction and sale of other excess merchandise. The
Company also intends to continue to develop its business model and to explore
other opportunities such as the use of the Company's Website as an advertising
medium for services and products of other companies, promoting new or
complementary products or sales formats and expanding the breadth and depth of
products and services offered on its Website. In addition, in the next three
months, the Company expects to begin offering credit to certain of its
business customers that have been pre-qualified as having appropriate credit
ratings. As its business model evolves, the Company risks diluting its brand,
confusing customers and decreasing interest from vendors. In addition, the
Company could be exposed to additional or new risks associated with these new
opportunities. If the Company is unable to address these risks, the Company's
business, results of operations and financial condition will be materially
adversely affected.
COMPETITION
The electronic commerce market is new, rapidly evolving and intensely
competitive, and the Company expects competition to intensify in the future.
The Company currently or potentially competes with a variety of other
companies depending on the type of merchandise and sales format offered to
customers. These competitors include: (i) various Internet auction houses such
as ONSALE, eBay, Yahoo! Auctions, First Auction (the auction site for Internet
Shopping Network, a wholly-owned subsidiary of Home Shopping Network Inc.),
Surplus Auction (a wholly-owned subsidiary of Egghead, Inc.), WebAuction (the
auction site for MicroWarehouse, Inc.) and Insight Auction (the auction site
for Insight Enterprises, Inc.); (ii) a number of indirect competitors that
specialize in electronic commerce or derive a substantial portion of their
revenue from electronic commerce, including Internet Shopping Network, AOL and
Cendant Corp.; (iii) a variety of other companies that offer merchandise
similar to that of the Company but through physical auctions and with which
the Company competes for sources of supply; (iv) personal computer
manufacturers that have their own direct distribution channels for their
excess inventory or refurbished products; and (v) companies with substantial
customer bases in the computer and peripherals catalog business, including CDW
Computer Centers, Inc., PC Connection, Inc. and the Parent, some of which
already sell online or may devote more resources to Internet commerce in the
future. In particular, ONSALE, Inc. began conducting auctions on the Internet
in May 1995 and has established
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significant market share and brand name recognition for online auctions for
computer-related equipment. In addition, AOL has taken a minority equity
interest in Bid.com (formerly, Internet Liquidators International, Inc.), a
competitor of the Company, and announced that the two companies have formed a
strategic partnership under which revenue from Bid.com's auction platforms is
shared with AOL and AOL provides a direct link for Bid.com's members to reach
Bid.com's electronic commerce site on the Web. The Company has its own
relationship with AOL pursuant to which the Company advertises on AOL and
which provides AOL's members with a direct link to the Company's Website.
The Company believes that the principal competitive factors affecting its
market are the ability to attract customers at favorable customer acquisition
costs, operate the Website in an uninterrupted manner and with acceptable
speed, provide effective customer service and obtain merchandise at
satisfactory prices. There can be no assurance that the Company can maintain
its competitive position against current and potential competitors, especially
those with greater financial, marketing, customer support, technical and other
resources than the Company.
Current and potential competitors have established or may establish
cooperative relationships among themselves or directly with vendors to obtain
exclusive or semi-exclusive sources of merchandise. Accordingly, it is
possible that new competitors or alliances among competitors and vendors may
emerge and rapidly acquire market share. In addition, manufacturers may elect
to liquidate their products directly. Increased competition is likely to
result in reduced operating margins, loss of market share and a diminished
brand franchise, any one of which could materially adversely affect the
Company's business, results of operations and financial condition. Many of the
Company's current and potential competitors have significantly greater
financial, marketing, customer support, technical and other resources than the
Company. As a result, such competitors may be able to secure merchandise from
vendors on more favorable terms than the Company, and they may be able to
respond more quickly to changes in customer preferences or to devote greater
resources to the development, promotion and sale of their merchandise than can
the Company. See "Business--Competition."
RELIANCE ON RELATIONSHIPS WITH ONLINE COMPANIES
The Company depends to some extent and is increasing its dependence on
relationships with other online companies. These relationships include, but
are not limited to, agreements for anchor tenancy, promotional placements,
sponsorships and banner advertisements. Generally, these agreements have terms
for up to a year, are not exclusive and do not provide for guaranteed renewal.
The risks included in this dependence include: (i) the possibility that a
competitor will purchase exclusive rights to attractive space on one or more
key sites; (ii) the uncertainty that significant spending on these
relationships will increase the Company's revenues substantially or at all;
(iii) the possibility that potential revenue increases resulting from such
spending will not occur within the time periods that the Company is expecting;
(iv) the possibility that space on other Websites or the same sites may
increase in price or cease to be available on reasonable terms or at all; (v)
the possibility that, if these relationships are successful, the Company may
not be able to obtain adequate amounts of merchandise to meet the increased
demand that is generated; (vi) the possibility that such online companies will
be unable to deliver a sufficient number of customer visits or impressions;
and (vii) the possibility that such online companies will compete with the
Company for limited online auction revenues. Any termination of the Company's
arrangements with other online companies could have a material adverse effect
on the Company's business, results of operations and financial condition. See
"Use of Proceeds" and "Business--Sales and Marketing."
RISKS OF A PURCHASED INVENTORY MODEL
The Company purchases a majority of its merchandise from vendors and thereby
assumes the inventory and price risks of these products to be sold at auction.
These risks are especially significant because much of the merchandise
currently auctioned by the Company (e.g., computer, consumer electronics and
home and leisure products) is characterized by rapid technological change,
obsolescence and price erosion. Since the Company relies heavily on purchased
inventory, its success will depend on its ability to liquidate its inventory
rapidly
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through its auctions, the ability of its buying staff to purchase inventory at
attractive prices relative to its resale value at auction, and its ability to
manage customer returns and the shrinkage resulting from theft, loss and
misrecording of inventory. Due to the inherently unpredictable nature of
auctions, it is impossible to determine with certainty whether an item will
sell for more than the price paid by the Company. Further, because minimum
opening bid prices for the merchandise listed on the Company's Website
generally are lower than the Company's acquisition costs for such merchandise,
there can be no assurance that the Company will achieve positive gross margins
on any given sale. If the Company is unable to liquidate its purchased
inventory rapidly, if the Company's buying staff fails to purchase inventory
at attractive prices relative to its resale value at auction, or if the
Company fails to predict with accuracy the resale prices for its purchased
merchandise, the Company may be forced to sell its inventory at a discount or
at a loss and the Company's business, results of operations and financial
condition would be materially adversely affected. See "Business--Products and
Merchandising" and "--Vendor Relationships."
RELIANCE ON MERCHANDISE VENDORS
The Company depends upon vendors to supply it with excess merchandise for
sale through the Company's Internet auctions, and the availability of such
merchandise can be unpredictable. Since Inception, the Company has sourced
merchandise from over 100 vendors. Merchandise acquired from 10 of these
vendors has represented approximately 57% of the Company's gross merchandise
sales since Inception. Merchandise acquired from one vendor, the Parent,
represented over 90% of the merchandise sold by the Company in the first two
months of operations, decreased to approximately 30% in March and April 1998,
and represented less than 15% since May 1998. None of these vendors is subject
to a long-term supply contract with the Company. There can be no assurance
that the Company's current vendors will continue to sell merchandise to the
Company or otherwise provide merchandise for sale in the Company's auctions or
that the Company will be able to establish new vendor relationships that
ensure merchandise will be available for auction on the Company's Website. A
limited number of these vendors process and ship merchandise directly to the
Company's customers. The Company has limited control over the shipping
procedures of such vendors, and shipments could be subject to delays outside
the control of the Company. Most merchandise sold by the Company carries a
warranty supplied either by the manufacturer or the vendor. In addition,
although the Company is not obligated to accept merchandise returns, the
Company could be compelled to accept returns from customers for which the
Company did not receive reimbursements from its vendors or manufacturers if
such warranties are not honored. If the Company is unable to develop and
maintain satisfactory relationships with vendors on acceptable commercial
terms, if the Company is unable to obtain sufficient quantities of
merchandise, if the quality of service provided by such vendors falls below a
satisfactory standard or if the Company's level of returns exceeds its
expectations, the Company's business, results of operations and financial
condition will be materially adversely affected. See "Business--Products and
Merchandising," "--Vendor Relationships" and "--Customer Support and Service."
RELIANCE ON OTHER THIRD PARTIES
In addition to its merchandise vendors, the Company's operations depend on a
number of third parties for Internet/telecom access, delivery services, credit
card processing and software services. The Company has limited control over
these third parties and no long-term relationships with any of them. For
example, the Company does not own a gateway onto the Internet, but instead,
through the Parent, relies on an Internet service provider, Pacific Bell, to
connect the Company's Website to the Internet. From time to time, the Company
has experienced temporary interruptions in its Website connection and also its
telecommunications access. Continuous or prolonged interruptions in the
Company's Website connection or in its telecommunications access, or slow
Internet transmissions, would have a material adverse effect on the Company's
business, results of operations and financial condition. The Company uses UPS
and Federal Express as its delivery services for substantially all of its
products. Should either or both be unable to deliver the Company's products
for a sustained time period as a result of a strike or other reason, the
Company's business, results of operations and financial condition would be
adversely affected. Under an agreement with the Parent, Paymentech processes a
majority of the Company's credit card transactions. If, due to computer
systems failures or other problems related to these
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third-party service providers, the Company experiences any delays in shipment,
its business, results of operations and financial condition would be adversely
affected. The Company's internally-developed auction software depends on
operating system, database and server software that was developed and produced
by and licensed from third parties. The Company has from time to time
discovered errors and defects in the software from these third parties and, in
part, relies, on these third parties to correct these errors and defects in a
timely manner. If the Company is unable to develop and maintain satisfactory
relationships with such third parties on acceptable commercial terms, or the
quality of products and services provided by such third parties falls below a
satisfactory standard, the Company's business, results of operations and
financial condition will be materially adversely affected. See "Business--
Order Fulfillment," "--Technology" and "--Systems Operations."
RISK OF CAPACITY CONSTRAINTS; RELIANCE ON INTERNALLY-DEVELOPED SYSTEMS; SYSTEM
DEVELOPMENT RISKS
A key element of the Company's strategy is to generate a high volume of
traffic to, and use of, its Website. The Company's revenues depend entirely on
the number of customers who use its Website to purchase merchandise.
Accordingly, the satisfactory performance, reliability and availability of the
Company's Website, transaction-processing systems, network infrastructure and
delivery and shipping systems are critical to the Company's operating results,
as well as to its reputation and its ability to attract and retain customers
and maintain adequate customer service levels.
The Company periodically has experienced minor systems interruptions,
including Internet disruptions, which it believes may continue to occur from
time to time. Any systems interruptions, including Internet disruptions, that
result in the unavailability of the Company's Website or reduced order
fulfillment performance would reduce the volume of goods sold, which could
have a material adverse effect on the Company's business, results of
operations and financial condition. The Company is continually enhancing and
expanding its transaction-processing systems, network infrastructure, delivery
and shipping systems and other technologies to accommodate a substantial
increase in the volume of traffic on the Company's Website. There can be no
assurance that the Company will be successful in these efforts or that the
Company will be able to accurately project the rate or timing of increases, if
any, in the use of its Website or timely expand and upgrade its systems and
infrastructure to accommodate such increases. There can be no assurance that
the Company's or its suppliers' network will be able to timely achieve or
maintain a sufficiently high capacity of data transmission, especially if the
customer usage of the Company's Website increases. The Company's failure to
achieve or maintain high capacity data transmission could significantly reduce
consumer demand for its services and have a material adverse effect on its
business, results of operations and financial condition. See "Business--
Technology" and "--Systems Operations."
MANAGEMENT OF POTENTIAL GROWTH; NEW MANAGEMENT TEAM
The Company has rapidly and significantly expanded its operations and
anticipates that significant expansion of its operations will continue to be
required in order to address potential market opportunities. This rapid growth
has placed, and is expected to continue to place, a significant strain on the
Company's management, operational and financial resources. The Company
expanded from two employees at Inception to 49 employees and 49 full-time
equivalent contract personnel related to the Company's distribution center and
call center at September 30, 1998, and its sales increased from approximately
50 units per week at the beginning of the first quarter of 1998 to over 6,500
units per week at September 30, 1998. The Company's new employees include a
number of key managerial and technical employees who have not yet been fully
integrated into the Company's management team, and the Company expects to add
additional key personnel in the near future. Increases in the number of
employees and the volume of merchandise sales have placed significant demands
on the Company's management, which as of September 30, 1998 included only five
executive officers. In order to manage the expected growth of its operations,
the Company will be required to expand existing operations, particularly with
respect to customer service and merchandising, to improve existing and
implement new operational, financial and inventory systems, procedures and
controls. The Company also will be required to expand its accounting staff.
Further, the Company's management will be required to maintain relationships
with various merchandise
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vendors, freight companies, warehouse operators, other Websites and services,
Internet service providers and other third parties and to maintain control
over the strategic direction of the Company in a rapidly changing environment.
Historically, the Company has been dependent upon the Parent for various
services, including administration (accounting, human resources, legal),
Internet/telecom and joint marketing. See "--Dependence of the Company on the
Parent for Certain Services." There can be no assurance that the Company's
current personnel, systems, procedures and controls will be adequate to
support the Company's future operations, that management will be able to
identify, hire, train, retain, motivate and manage required personnel or that
management will be able to manage and exploit existing and potential market
opportunities successfully. If the Company is unable to manage growth
effectively, the Company's business, results of operations and financial
condition will be materially adversely affected. See "Business--Employees" and
"Management."
RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE; DEPENDENCE ON THE INTERNET
The Internet and electronic commerce industries are characterized by rapid
technological change, changes in user and customer requirements, frequent new
service or product introductions embodying new technologies and the emergence
of new industry standards and practices that could render the Company's
existing Website and proprietary technology obsolete. The Company's
performance will depend, in part, on its ability to license or acquire leading
technologies, enhance its existing services, and respond to technological
advances and emerging industry standards and practices on a timely and cost-
effective basis. The development of Website and other proprietary technology
entails significant technical and business risks. There can be no assurance
that the Company will be successful in using new technologies effectively or
adapting its Website and proprietary technology to emerging industry
standards. If the Company is unable, for technical, legal, financial or other
reasons, to adapt in a timely manner to changing market conditions or customer
requirements, or if the Company's Website does not achieve market acceptance,
the Company's business, results of operations and financial condition would be
materially adversely affected. The success of the Company's services will
depend in large part upon the development of an infrastructure for providing
Internet access and services. The Internet could lose its viability due to
delays in the development or adoption of new standards and protocols intended
to handle increased levels of Internet activity or due to increased
governmental regulation. There can be no assurance that the infrastructure or
complementary services necessary to make the Internet a viable commercial
marketplace will be developed or that, if they are developed, the Internet
will become a viable marketing and sales channel for excess merchandise such
as that offered by the Company. The recent growth in the use of the Internet
has caused frequent periods of performance degradation, requiring the upgrade
of routers and switches, telecommunications links and other components forming
the infrastructure of the Internet service providers and other organizations
with links to the Internet. Any perceived degradation in the performance of
the Internet as a whole could undermine the benefits of the Company's
services. The Company's ability to increase the speed with which it provides
services to customers and to increase the scope of such services ultimately is
limited by and reliant upon the speed and reliability of the networks operated
by third parties. Consequently, the emergence and growth of the market for the
Company's services is dependent on improvements being made to the entire
Internet infrastructure to alleviate overloading and congestion. If the
infrastructure or complementary services necessary to make the Internet a
viable commercial marketplace are not developed or if the Internet does not
become a viable commercial marketplace, the Company's business, results of
operations and financial condition will be materially adversely affected. See
"Business--Industry Background," "--Technology" and "--Systems Operations."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, laws
applicable to auction companies and auctioneers, and laws or regulations
directly applicable to access to or commerce on the Internet. However, due to
the increasing popularity and use of the Internet, it is possible that a
number of laws and regulations may be adopted with respect to the Internet,
covering issues such as user privacy, pricing, and characteristics and quality
of products and services. Furthermore, the growth and development of the
market for Internet commerce may prompt calls for more
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stringent consumer protection laws that may impose additional burdens on those
companies conducting business over the Internet. The adoption of any
additional laws or regulations may decrease the growth of the Internet, which,
in turn, could decrease the demand for the Company's Internet auctions and
increase the Company's cost of doing business or otherwise have an adverse
effect on the Company's business, results of operations and financial
condition. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, auction
regulation, sales tax, libel and personal privacy is uncertain and may take
years to resolve. In addition, as the Company's service is available over the
Internet in multiple states, and as the Company sells to numerous consumers
resident in such states, such jurisdictions may claim that the Company is
required to qualify to do business as a foreign corporation in each such
state. The Company is qualified to do business in only three states, and
failure by the Company to qualify as a foreign corporation in a jurisdiction
where it is required to do so could subject the Company to taxes and penalties
for the failure to qualify. Any such new legislation or regulation, or the
application of laws or regulations from jurisdictions whose laws do not
currently apply to the Company's business, could have a material adverse
effect on the Company's business, results of operations and financial
condition.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The Company's future performance depends to a significant degree upon the
continued contributions of members of Company's senior management and other
key personnel, particularly its CEO and President, Gregory K. Jones; Vice
President-Information Systems, George Lu; Vice President-Merchandising,
Timothy Takesue; and Vice President and Chief Financial Officer, Thomas E.
Werner. The loss of any of these individuals could have a material adverse
effect on the Company's business, results of operations and financial
condition. In addition, as a result of the Separation, the Company will need
to employ additional personnel for certain functions that were previously
performed by employees of the Parent. The Company has a long-term employment
agreement with only one of its key personnel, Gregory K. Jones, and maintains
no key person life insurance. In order to meet expected growth and to operate
independently of the Parent, the Company believes that its future success will
depend upon its ability to identify, attract, hire, train, motivate and retain
other highly-skilled managerial, merchandising, engineering, marketing and
customer service personnel. Competition for such personnel is intense. There
can be no assurance that the Company will be successful in attracting,
assimilating or retaining the necessary personnel, and the failure to do so
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Employees" and
"Management."
RISK OF SYSTEM FAILURE; SINGLE SITE
The Company's success is largely dependent upon its communications hardware
and computer hardware, substantially all of which are located at a leased
facility in Torrance, California. The Company's systems are vulnerable to
damage from earthquake, fire, flood, power loss, telecommunication failure,
break-in and similar events. The Company has redundant systems but not
duplicate geographic locations. The Company plans to add a fully redundant
site outside of California within the next 12 months. There can be no
assurance that the second site will be established or that it can be
established without interruption in the Company's systems. A substantial
interruption in these systems would have a material adverse effect on the
Company's business, results of operations and financial condition. To date,
the Company has experienced variable interruptions to its service as a result
of loss of power and telecommunications connections. The property and business
interruption insurance covering the Company may not be adequate to compensate
the Company for all losses that may occur. Despite the implementation of
network security measures and firewall security by the Company, its servers
are also vulnerable to computer viruses, physical or electronic break-ins,
attempts by third parties deliberately to exceed the capacity of the Company's
systems and similar disruptive problems. Computer viruses, break-ins or other
problems caused by third parties could lead to interruptions, delays, loss of
data or cessation in service to users of the Company's services and products.
The occurrence of any of these risks could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Business--Technology," "--Systems Operations," "--Insurance Coverage" and "--
Facilities."
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INTERNET COMMERCE SECURITY RISKS; RISK OF CREDIT CARD FRAUD
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. The
Company relies on encryption and authentication technology licensed by the
Parent from third parties to provide the security and authentication necessary
to effect secure transmission of confidential information. This technology
will be made available to the Company after the Offering under the
Internet/Telecommunications Agreement (as defined) with the Parent. There can
be no assurance that advances in computer capabilities, new discoveries in the
field of cryptography or other events or developments will not result in a
compromise or breach of the algorithms used by the Company to protect customer
transaction data. If any such compromise of the Company's security were to
occur, it could have a material adverse effect on the Company's business,
results of operations and financial condition. A party who is able to
circumvent the Company's security measures could misappropriate proprietary
information or cause interruptions in the Company's operations. The Company
may be required to expend significant capital and other resources to protect
against the threat of such security breaches or to alleviate problems caused
by such breaches. Concerns over the security of Internet transactions and the
privacy of users may also inhibit the growth of the Internet generally, and
the Web in particular, especially as a means of conducting commercial
transactions. To the extent that activities of the Company or third-party
contractors involve the storage and transmission of proprietary information,
such as credit card numbers, security breaches could expose the Company to a
risk of loss or litigation and possible liability. There can be no assurance
that the Company's security measures will prevent security breaches or that
failure to prevent such security breaches will not have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business--Technology" and "--Systems Operations."
PROTECTION OF INTELLECTUAL PROPERTY
The Company's performance and ability to compete are dependent to a
significant degree on its proprietary technology. The Company relies on a
combination of trademark, copyright and trade secret laws, as well as
confidentiality agreements and non-compete agreements executed by each manager
and technical measures to establish and protect its proprietary rights. The
uBid/SM/ service mark is registered in the United States. There can be no
assurance that the Company will be able to secure significant protection for
its service marks or trademarks. It is possible that competitors of the
Company or others will adopt product or service names similar to "uBid" or
other service marks or trademarks of the Company, thereby impeding the
Company's ability to build brand identity and possibly leading to customer
confusion. The inability of the Company to protect the name "uBid" adequately
could have a material adverse effect on the Company's business, results of
operations and financial condition. The Company's proprietary software is
protected by copyright laws. The source code for the Company's proprietary
software also is protected under applicable trade secret laws. All patent,
copyright and other proprietary rights with respect to the Company's auction
processing and auction management applications and certain general purpose
libraries are co-owned by the Company and the third-party developers of such
applications and libraries pursuant to various agreements among such
third-party developers and the Parent which the Parent has assigned to the
Company. As part of its confidentiality procedures, the Company generally
enters into agreements with its employees and consultants and limits access to
and distribution of its software, documentation and other proprietary
information. There can be no assurance that the steps taken by the Company
will prevent misappropriation of its technology or that agreements entered
into for that purpose will be enforceable. Notwithstanding the precautions
taken by the Company, it might be possible for a third party to copy or
otherwise obtain and use the Company's software or other proprietary
information without authorization or to develop similar software
independently. Policing unauthorized use of the Company's technology is
difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. The laws of other countries may afford the Company little or
no effective protection of its intellectual property.
The Company may in the future receive notices from third parties claiming
infringement by the Company's software or other aspects of the Company's
business. While the Company is not currently subject to any such claim, any
future claim, with or without merit, could result in significant litigation
costs and diversion of
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resources, including the attention of management, and require the Company to
enter into royalty and licensing agreements, which could have a material
adverse effect on the Company's business, results of operations and financial
condition. Such royalty and licensing agreements, if required, may not be
available on terms acceptable to the Company or at all. In the future, the
Company may also need to file lawsuits to enforce the Company's intellectual
property rights, to protect the Company's trade secrets, or to determine the
validity and scope of the proprietary rights of others. Such litigation,
whether successful or unsuccessful, could result in substantial costs and
diversion of resources, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company also relies on a variety of technology that it licenses from
third parties. There can be no assurance that these third-party technology
licenses will continue to be available to the Company on commercially
reasonable terms. The loss of or inability of the Company to maintain or
obtain upgrades to any of these technology licenses could result in delays in
completing its proprietary software enhancements and new developments until
equivalent technology could be identified, licensed or developed and
integrated. Any such delays would materially adversely affect the Company's
business, results of operations and financial condition. See "Business--
Intellectual Property and Other Proprietary Rights."
RISKS ASSOCIATED WITH GLOBAL EXPANSION
Although the Company currently may not sell merchandise to customers outside
the United States due to contractual restrictions involving the Parent, it
intends to do so in the future. The Company does not currently have any
overseas fulfillment or distribution facility or arrangement or any Website
content localized for foreign markets, and there can be no assurance that the
Company will be able to establish a global presence. In addition, there are
certain risks inherent in doing business on a global level, such as regulatory
requirements, export restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, difficulties in
protecting intellectual property rights, longer payment cycles, problems in
collecting accounts receivable, political instability, fluctuations in
currency exchange rates and potentially adverse tax consequences, which could
adversely impact the success of the Company's global operations. In addition,
the export of certain software from the United States is subject to export
restrictions as a result of the encryption technology in such software and may
give rise to liability to the extent the Company violates such restrictions.
There can be no assurance that the Company will be able to successfully
market, sell and distribute its products in foreign markets or that one or
more of such factors will not have a material adverse effect on the Company's
future global operations, and consequently, on the Company's business, results
of operations and financial condition.
RISKS ASSOCIATED WITH ACQUISITIONS
The Company may choose to expand its market presence through acquisitions of
complementary businesses. Although no such acquisitions are currently being
negotiated, any future acquisitions would expose the Company to increased
risks, including risks associated with the assimilation of new operations,
sites and personnel, the diversion of resources from the Company's existing
businesses, sites and technologies, the inability to generate revenues from
new sites or content sufficient to offset associated acquisition costs, the
maintenance of uniform standards, controls, procedures and policies and the
impairment of relationships with employees and customers as a result of any
integration of new management personnel. Acquisitions may also result in
additional expenses associated with amortization of acquired intangible assets
or potential businesses. There can be no assurance that the Company would be
successful in overcoming these risks or any other problems encountered in
connection with such acquisitions, and its inability to overcome such risks
could have a material adverse effect on the Company's business, results of
operations and financial condition.
RISK OF NONCOMPLETION OF A TAX-FREE DISTRIBUTION
The Parent has announced that, subject to certain conditions, following the
Offering, the Parent intends to distribute to its stockholders in 1999 all of
the Common Stock owned by the Parent. See "Separation from the Parent--
Conditions to the Distribution" and "Certain Transactions--Separation and
Distribution Agreement."
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The Company has received an opinion letter from PricewaterhouseCoopers LLP
(the "PwC Opinion") to the effect that the Distribution will qualify as a tax-
free distribution for federal income tax purposes under Section 355 of the
Internal Revenue Code of 1986, as amended (the "Code"), and the Distribution
is conditional upon obtaining such an opinion letter in form and substance
satisfactory to the Parent and confirmation of such opinion at the time of
Distribution. The Parent may also decide, in its sole discretion, to seek a
private letter ruling from the Internal Revenue Service ("IRS") in form and
substance satisfactory to the Parent (the "Letter Ruling") consistent with the
conclusions reached in the PwC Opinion. In that case, the Distribution would
also be conditioned upon receipt of the Letter Ruling. The Parent intends to
take all necessary steps to complete such a tax-free distribution after
obtaining the PwC Opinion and the Letter Ruling, as applicable, but in no
event will the Distribution occur prior to 180 days after consummation of the
Offering. If the Parent decides to apply for the Letter Ruling, the Parent
does not plan to distribute its shares of Common Stock to the Parent's
stockholders without such a favorable Letter Ruling. Due to recent changes in
the tax law and other factors, there is no assurance that the Parent will
receive the Letter Ruling, or that it will receive it within the time frame
contemplated, and, consequently, there is no assurance that the Distribution
will occur or will occur within the time frame contemplated. The Distribution
also is subject to the condition that no events or developments occur
following the Offering Closing Date that, in the sole judgment of the Board of
Directors of the Parent (the "Parent Board"), would or could result in the
Distribution having a material adverse effect on the Parent or the Parent's
stockholders. In addition, as a condition to the Distribution, the Parent will
be required to obtain certain consents from third parties. There can be no
assurance that any of the foregoing conditions, or any other conditions to the
Distribution, will be satisfied, or that the Distribution will occur in the
time frame contemplated or at all. The failure of the Distribution to occur
could materially adversely affect the Company and the market price of the
Common Stock. See "Separation from the Parent--Background of the Separation
and Distribution," "Certain Transactions--Tax Indemnification and Allocation
Agreement" and "U.S. Federal Income Tax Consequences of the Distribution."
CONTROL OF THE COMPANY; RELATIONSHIP WITH THE PARENT
Prior to the Offering Closing Date, the Company has been a wholly-owned,
indirect subsidiary of the Parent. On the Offering Closing Date, the Parent
will own approximately 82.3% of the outstanding shares of Common Stock (80.1%
if the Underwriters exercise their over-allotment option in full). As a
result, until the Distribution, the Parent generally will be able to control
all matters requiring approval of the stockholders of the Company, including
the election of all of the Company's directors. The Company's Board of
Directors (the "Board") currently consists of three members, one of whom
serves concurrently as a member of the Parent's Board. The Parent intends to
maintain ownership of at least 80% of the voting power of the Common Stock
until the Distribution can be completed. There can be no assurance that the
Parent will complete the Distribution of the Common Stock held by it to the
Parent's stockholders. If the Distribution is not effected, the Parent could
maintain a controlling interest in the Company indefinitely, which may
materially adversely affect the Company and the market price of the Common
Stock. In addition, for so long as the Parent maintains a significant interest
in the Company, the market price of the Common Stock may be adversely affected
by events relating to the Parent which are unrelated to the Company. It is the
intention of the Parent to complete the Distribution promptly but in no event
prior to 180 days after consummation of the Offering. See "Separation from
the Parent."
Each member of a consolidated group for federal income tax purposes is
jointly and severally liable for the federal income tax liability of each
other member of the consolidated group. For benefit plan purposes, the Company
will be part of the Parent's consolidated group, which includes the Parent and
its other subsidiaries. Under the Employee Retirement Income Security Act of
1974, as amended, and federal income tax law, each member of the consolidated
group is jointly and severally liable for funding and termination liabilities
of tax qualified defined benefit retirement plans as well as certain plan
taxes. Accordingly, during the period in which the Company is included in the
Parent's consolidated group, the Company could be liable under such provisions
in the event such liability or tax is incurred, and not discharged, by any
other member of the Parent's consolidated group. See "Certain Transactions--
Tax Indemnification and Allocation Agreement."
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DEPENDENCE OF THE COMPANY ON THE PARENT FOR CERTAIN SERVICES
The Company historically has been dependent upon the Parent for various
services, including administration (accounting, human resources, legal),
Internet/telecom and joint marketing. Prior to the Offering Closing Date, the
Company and the Parent intend to enter into an agreement under which the
Parent will continue to provide these services to the Company in exchange for
fees payable by the Company to the Parent, for an initial term expiring one
year following the Offering Closing Date. After the initial term of such
agreement, the Company will need to either extend the term of such agreement,
engage others to perform such services or perform such services internally. No
assurance can be given that the Parent will continue to provide the Company
with such services after the initial term of the agreement, or that the cost
of such services will not be significantly higher if the Company purchases
such services from unaffiliated providers or employs staff to handle such
functions internally. See "Certain Transactions--Services Agreement."
INTERCOMPANY AGREEMENTS NOT SUBJECT TO ARM'S-LENGTH NEGOTIATIONS; POSSIBLE
COMPETITION FROM THE PARENT; INDEMNIFICATION OBLIGATIONS
Prior to the Offering Closing Date, the Parent and the Company intend to
enter into certain intercompany agreements, including agreements pursuant to
which the Parent will provide various services, such as administration
(accounting, human resources, legal), Internet/telecom and joint marketing,
that are material to the conduct of the Company's business. Because the
Company is a wholly-owned, indirect subsidiary of the Parent, none of these
agreements will result from arm's-length negotiations and, therefore, there is
no assurance that the terms and conditions of such agreements will be no less
favorable to the Company as could be obtained by the Company from unaffiliated
third parties. See "Certain Transactions." The Company's proposed intercompany
agreements will provide that the Parent, for a period of nine months after the
date of the Distribution ("Distribution Date"), will not compete in the online
Internet auction business in substantially the same manner or format as
currently conducted by the Company. After that period, the Parent will not be
prohibited from competing directly or indirectly with the Company, including
by way of acquiring other companies or businesses, which could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, the Company has agreed to indemnify, defend and hold
harmless the Parent and each of the Parent's directors, officers and employees
from and against all liabilities relating to, arising out of or resulting
from: (i) the failure of the Company or any other person to pay, perform or
otherwise promptly discharge any liabilities of the Company in accordance with
their respective terms; (ii) any breach by the Company of any of the
intercompany agreements entered into by the parties in connection with the
Separation and Distribution; and (iii) any untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, with respect to all information contained
in this Prospectus or the Registration Statement of which it forms a part. See
"--No Duty to Communicate Corporate Opportunities" and "Certain Transactions--
Releases and Indemnification."
TAX INDEMNIFICATION OBLIGATION; LIMITATIONS ON ISSUANCES OF EQUITY SECURITIES
FOLLOWING THE DISTRIBUTION
As a condition to the Parent effecting the Distribution, the Company will be
required to indemnify the Parent for any tax liability suffered by the Parent
arising out of actions by the Company after the Distribution that would cause
the Distribution to lose its qualification as a tax-free distribution or to be
taxable to the Parent for federal income tax purposes under Section 355 of the
Code. For example, Section 355 generally provides that a company that
distributes shares of a subsidiary in a spin-off that is otherwise tax-free
will incur U.S. federal income tax liability if 50% or more, by vote or value,
of the capital stock of either the company making the distribution or the
subsidiary is acquired by one or more persons acting pursuant to a plan or
series of related transactions that include the spin-off. To ensure that
issuances of equity securities by the Company will not cause the Distribution
to be taxable to the Parent, the Tax Indemnification and Allocation Agreement
contains certain restrictions on issuances of equity securities of the Company
and its repurchase of equity securities until three years following the
Distribution Date (the "Restriction Period"). Until the second anniversary of
the Distribution Date, the Company cannot issue Common Stock and other equity
securities (including the shares sold in the Offering) that would cause the
number of shares of Common Stock to be distributed by the Parent in the
Distribution to
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constitute less than 60% of the outstanding shares of Common Stock unless the
Company first obtains either the consent of the Parent or a favorable IRS
letter ruling that the issuance will not affect the tax-free status of the
Distribution. After this period until the end of the third year from the
Distribution Date, the Company cannot issue additional shares of Common Stock
and other equity securities that, when combined with equity securities sold in
and after the Offering, would cause the number of shares of Common Stock to be
distributed by the Parent in the Distribution to constitute less than 55% of
the outstanding shares of Common Stock unless the Company first obtains the
consent of the Parent or a favorable IRS letter or opinion of tax counsel that
the issuance would not affect the tax-free status of the Distribution. These
restrictions on the issuance of equity securities may impede the ability of
the Company to raise necessary capital or to complete acquisitions, if any,
using equity securities. The foregoing prohibitions do not apply to issuances
of debt securities of the Company that are not convertible into Common Stock
or other equity securities. The same requirements for an IRS ruling, consent
of the Parent or an opinion of counsel are applicable to any proposed
repurchases of Common Stock during the Restriction Period. In the event that
the Company is required to indemnify and reimburse the Parent for any tax
liability incurred by the Parent arising out of the Distribution, such
indemnification and reimbursement would have a material adverse effect on the
business, results of operations and financial condition of the Company. See
"--Limited Ability to Issue Common Stock Prior to Distribution," "Certain
Transactions--Tax Indemnification and Allocation Agreement" and "U.S. Federal
Income Tax Consequences of the Distribution."
CONFLICTS OF INTEREST WITH THE PARENT
After the Offering Closing Date, none of the executive officers of the
Parent will be executive officers of the Company. One member of the Board will
be a member of the Parent's Board. In addition, certain executive officers,
directors and employees of the Company hold shares of Parent Common Stock and
options to acquire shares of Parent Common Stock. In particular, Mr. Frank F.
Khulusi, a director of the Company, is the Chairman of the Board of the Parent
and beneficially owns approximately 1.8 million shares of Parent Common Stock
constituting approximately 17.7% of the issued and outstanding Parent Common
Stock. Accordingly, such individuals may have conflicts of interest with
respect to certain decisions relative to business opportunities and similar
matters that may arise in the ordinary course of the business of the Parent or
the Company, including with respect to relationships between the Parent and
the Company under intercompany agreements and whether to complete the
Distribution. See "Certain Transactions." The Company and the Parent intend to
resolve such conflicts on a case-by-case basis. In that regard, certain of the
conflicts, if any, could be resolved in a manner adverse to the Company and
its stockholders, which would have a material adverse effect on the business,
results of operations and financial condition of the Company.
NO DUTY TO COMMUNICATE CORPORATE OPPORTUNITIES
From and after the Offering Closing Date, neither the Company nor the Parent
will have any duty to communicate or offer any corporate opportunities to the
other and may pursue or acquire any such opportunities for itself or direct
such opportunities to any other person. There can be no assurance that the
Parent's failure to communicate any corporate opportunity to the Company, the
Parent's pursuit of such opportunity for itself or the Parent's communication
of such corporate opportunity to a third party will not have a material
adverse affect on the Company's business, results of operations or financial
condition.
LIMITED ABILITY TO ISSUE COMMON STOCK PRIOR TO DISTRIBUTION
In order for the Distribution to be tax-free to the Parent and the Parent's
stockholders, among various other requirements, the Parent must distribute to
the Parent's stockholders on the Distribution Date (a) stock of the Company
possessing at least 80% of the total combined voting power of all classes of
voting stock of the Company and (b) 80% of the total number of shares of each
class of non-voting stock of the Company (the "Required Distribution
Percentage"). If the Parent were not able to distribute to its stockholders
shares of stock of the Company constituting the Required Distribution
Percentage, the Distribution would not be tax-free and would not occur.
Accordingly, the Company will agree in the Separation and Distribution
Agreement (as defined below) not
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to issue additional shares of Common Stock, or any other class of stock
including preferred stock, without the consent of the Parent if such issuance
would, or could, dilute or otherwise reduce the Parent's ownership of Common
Stock, or any other such class of stock, below the Required Distribution
Percentage or otherwise prevent the Distribution from receiving tax-free
status. The Separation and Distribution Agreement will terminate if the
Distribution does not occur on or prior to December 31, 1999, unless extended
by the Parent and the Company. Prior to the Distribution Date, these
restrictions may impede the ability of the Company to issue equity securities,
including Common Stock, to raise necessary equity capital or to complete
acquisitions using equity securities, including Common Stock, as acquisition
currency, or to attract qualified persons to become employees, officers and
directors of the Company. See "Certain Transactions--Separation and
Distribution Agreement."
SHARES ELIGIBLE FOR FUTURE SALE
Subject to applicable law and to the contractual restriction with the
Underwriters described below, the Parent may sell any and all of the shares of
Common Stock it owns after completion of the Offering. The Separation and
Distribution Agreement will provide that the Parent, and certain holders of
more than 5% of Parent Common Stock, will have the right in certain
circumstances to require the Company to use its best efforts to register for
resale shares of Common Stock held by them. See "Certain Transactions--
Separation and Distribution Agreement." In addition, the Parent may make
additional investments in the Company prior to the consummation of the
Offering. The planned Distribution would involve the distribution of an
aggregate of approximately 7.3 million shares of Common Stock to the
stockholders of the Parent in 1999 (assuming that no shares of Common Stock
are disposed of or acquired by the Parent between the Offering Closing Date
and the Distribution Date). See "Description of Capital Stock." Except for
shares held by affiliates of the Company, all of the shares of Common Stock to
be distributed to the Parent's stockholders in the Distribution will be
eligible for immediate resale in the public market. The Company is unable to
predict whether substantial amounts of Common Stock will be sold in the open
market in anticipation of, or following, the Distribution. Any sales of
substantial amounts of Common Stock in the public market, or the perception
that such sales might occur, whether as a result of the Distribution or
otherwise, could materially adversely affect the market price of the Common
Stock. The Company has agreed, for a period of 180 days after the date of this
Prospectus, and Messrs. Frank and Sam Khulusi have agreed, until 180 days
after the Distribution, not to offer or sell any shares of Common Stock,
subject to certain exceptions (including the Distribution), without the prior
written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") on behalf of the Underwriters. See "Shares Eligible for
Future Sale."
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
Certain provisions of Delaware law and the Company's Certificate of
Incorporation and Bylaws, each as amended on November 30, 1998 (the
"Certificate of Incorporation" and the "Bylaws," respectively), may have the
effect of delaying, deterring or preventing a future takeover or change in
control of the Company unless such takeover or change in control is approved
by the Company's Board of Directors. Such provisions also may render the
removal of directors and management more difficult. Such provisions could
limit the price that certain investors might be willing to pay in the future
for shares of the Company's Common Stock. These provisions of Delaware law and
the Company's Certificate of Incorporation and Bylaws may also have the effect
of discouraging or preventing certain types of transactions involving an
actual or threatened change of control of the Company (including unsolicited
takeover attempts), even though such a transaction may offer the Company's
stockholders the opportunity to sell their stock at a price above the
prevailing market price. In addition, the Company's Board of Directors has the
authority to issue up to five million shares of undesignated preferred stock
(the "Undesignated Preferred Stock") and to determine the price, rights,
preferences and privileges of those shares without any further vote or actions
by the stockholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Undesignated Preferred Stock that may be issued in the future. The issuance of
such shares of Undesignated Preferred Stock, while potentially providing
desirable flexibility in connection with possible acquisitions and serving
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or may discourage a third party from
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attempting to acquire, a majority of the outstanding voting stock of the
Company. In addition, the Company is subject to the anti-takeover provisions
of Section 203 of the Delaware General Corporation Law (the "DGCL"), which
will prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless the
business combination is approved in a prescribed manner. The application of
Section 203 of the DGCL also could have the effect of delaying or preventing a
change of control of the Company. In addition, the Company's Certificate of
Incorporation will be amended prior to the Offering Closing Date to provide
that the Board of Directors will be divided into three classes of directors
serving staggered terms. The classification provision could have the effect of
discouraging a third party from making a tender offer or otherwise attempting
to gain control of the Company. See "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
At an assumed initial public offering price of $13.50 per share, purchasers
of shares of Common Stock in the Offering will incur immediate and substantial
dilution of $11.76 per share in the net tangible book value (deficit) of their
purchased shares of Common Stock. See "Dilution." Investors may also
experience additional dilution as a result of shares of Common Stock being
issued in future business acquisitions and as a result of the issuance and
exercise of employee stock options or warrants. See "Shares Eligible for
Future Sale."
NO DIVIDENDS
Following the Offering Closing Date, the Company intends to retain all
earnings for the foreseeable future for use in the operation and expansion of
its business. Consequently, the Company does not anticipate paying any cash
dividends on its Common Stock to its stockholders for the foreseeable future.
In addition, it is probable that any debt financing agreements to be entered
into by the Company will contain restrictions on the Company's ability to
declare dividends. See "Dividend Policy."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Although the Common Stock has been approved for listing on the Nasdaq National
Market (subject to official notice of issuance), there can be no assurance
that an active trading market for the Common Stock will develop or be
sustained following the Offering or that the market price of the Common Stock
will not decline below the initial public offering price. The initial public
offering price will be determined by negotiation among the Company and the
Underwriters based upon several factors and may not be indicative of future
market prices. The price at which the Common Stock will trade will depend upon
a number of factors, including, but not limited to, the Company's historical
and anticipated operating results, announcements by the Company or its
competitors, developments with respect to proprietary rights, changes in
financial estimates by securities analysts, adoption of new accounting
standards affecting the retail industry, conditions and trends in the
electronic commerce industry and general market and economic conditions, some
of which factors are beyond the Company's control. In addition, the stock
market has from time to time experienced extreme price and volume
fluctuations. These broad market fluctuations may adversely affect the market
price of the Common Stock. See "Underwriting."
YEAR 2000 RISK
Computer systems, software packages, and microprocessor dependent equipment
may cease to function or generate erroneous data when the year 2000 arrives.
The problem affects those systems or products that are programmed to accept a
two-digit code in date code fields. To correctly identify the year 2000, a
four-digit date code field will be required to be what is commonly termed
"year 2000 compliant."
The Company may realize exposure and risk if the systems for which it is
dependent upon to conduct day-to-day operations are not year 2000 compliant.
The potential areas of exposure include electronic data exchange systems
operated by third parties with whom the Company transacts business, certain
products purchased from
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third parties for resale, and computers, software, telephone systems and other
equipment used internally. To minimize the potential adverse affects of the
year 2000 problem, the Company has established an internal project team
comprised of all functional disciplines. This project team has begun a three-
phase process of identifying internal systems (both information technology and
non-information technology systems) that are not year 2000 compliant,
determining their significance in the effective operation of the Company, and
developing plans to resolve the issues where necessary. The Company has been
communicating with the suppliers and others with whom it does business to
coordinate year 2000 readiness. The responses received by the Company to date
have indicated that steps are currently being undertaken to address this
concern. However, if such third parties are not able to make all systems year
2000 compliant, there could be a material adverse impact on the Company.
Initial review of the Company's principal application software through which
nearly all of the Company's business is transacted has determined it to be
year 2000 compliant and, as such, the Company does not anticipate any material
adverse operational issues to arise. The Company plans to complete the year
2000 compliance assessment by the end of the first quarter 1999 and implement
corrective solutions before the end of the third quarter 1999. Although the
Company historically has shared certain costs with the Parent in connection
with its year 2000 compliance project, management currently estimates the
costs attributable to the Company with respect to this project to date total
less than $10,000. Based on current estimates, management expects that the
Company's future costs in connection with its year 2000 compliance project
will not exceed $70,000; however, future anticipated costs are difficult to
estimate with any certainty and may differ materially from those currently
projected based on the results of phase one of the Company's year 2000
project. The anticipated costs associated with the Company's year 2000
compliance program do not include time and costs that may be incurred as a
result of any potential failure of third parties to become year 2000 compliant
or costs to implement the Company's future contingency plans. The Company has
not yet determined a contingency plan in the event that any non-compliant
critical systems are not remedied by January 1, 2000, nor has it formulated a
timetable to create such contingency plan. Upon completion of this project, if
systems material to the Company's operation have not been made year 2000
compliant, or if third parties fail to make their systems year 2000 compliant
in a timely manner, the year 2000 issue could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical fact are
"forward-looking statements" which can be identified by the use of forward-
looking terminology such as "believes," "expects," "may," "will," "should" or
"anticipates," or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Management cautions the reader that these forward-looking
statements, including the discussions of the Company's growth and operating
strategies and expectations concerning market position, future operations,
margins, revenue, profitability, liquidity and capital resources and other
matters contained in this Prospectus regarding matters that are not historical
facts, are only predictions. No assurance can be given that the future results
indicated, whether expressed or implied, will be achieved. While sometimes
presented with numerical specificity, these forward-looking statements are
based upon a variety of assumptions relating to the business of the Company,
which, although considered reasonable by the Company, may not be realized.
Because of the number and range of the assumptions underlying the Company's
projections and forward-looking statements, many of which are subject to
significant uncertainties and contingencies that are beyond the reasonable
control of the Company, some of the assumptions inevitably will not
materialize and unanticipated events and circumstances may occur subsequent to
the date of this Prospectus. The forward-looking statements contained herein
are based on current expectations, and the Company assumes no obligation to
update this information. Therefore, the actual experience of the Company and
results achieved during the period covered by any particular projections or
forward-looking statements may differ substantially from those projected.
Consequently, the inclusion of projections and other forward-looking
statements should not be regarded as a representation by the Company or any
other person that these estimates and projections will be realized, and actual
results may vary materially. There can be no assurance that any of these
expectations will be realized or that any of the forward-looking statements
contained herein will prove to be accurate.
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SEPARATION FROM THE PARENT
BACKGROUND OF THE SEPARATION AND DISTRIBUTION
The Parent has announced that, subject to certain conditions, the Parent
intends to consummate the Offering, to separate the Company, which owns and
operates the Parent's online auction business, from the Parent's other
operations and businesses and to distribute to its stockholders all of the
Common Stock owned by the Parent in no event prior to 180 days after
consummation of the Offering. See "Risk Factors--Risk of Noncompletion of a
Tax-Free Distribution." The Separation will establish the Company as a stand-
alone entity with objectives separate from those of the Parent. The Company
intends to focus its resources and management emphasis on the operations and
markets it views as critical to its long-term success as a stand-alone entity.
The Company and the Parent intend to enter into a Separation and Distribution
Agreement (the "Separation and Distribution Agreement") and certain other
agreements providing for the Offering, the Separation, the Distribution and
the provision by the Parent of certain interim services to the Company, and
addressing employee benefit arrangements, and tax and other matters. See
"Certain Transactions." On the Offering Closing Date, the Parent will own
approximately 82.3% of the outstanding Common Stock (80.1% if the Underwriters
exercise their over-allotment option in full).
Several business purposes underlie the proposed Distribution. The Company
desires to access the capital markets, and the Company and the Parent believe
that the raising of funds through consummation of the Offering provides the
most effective source of capital for the Company and is part of the initial
capitalization of the Company as a stand-alone entity. The Parent and the
Company believe that the Offering and the Distribution will provide each
entity with the most prudent capital structures to realize their respective
growth strategies as separate, stand-alone entities, based on the Company's
and the Parent's prospective capitalization and financing requirements,
acquisition strategies, working capital requirements, projected cash flows
from operations and desired credit ratings, respectively.
In addition to raising capital for the Company, the Company and the Parent
believe that the Distribution will enhance the Company's ability to implement
its growth and operating strategies. The Company believes that its future
growth would be enhanced if its management were compensated on a separate
basis from the Parent. The consummation of the Offering will better position
the Company to retain key employees by allowing such employees to participate
in the corporate growth of the Company as a stand-alone, publicly-traded
entity through stock options and other targeted incentives tied to the
performance of the Company. Similarly, the Parent believes that its future
growth would be enhanced if management of its remaining business segments were
more focused on such segments without also being responsible for the online
auction segment. Finally, upon completion of the Distribution, holders of
Parent Common Stock as of the record date for the Distribution will be
entitled to receive a dividend of Common Stock without the payment of further
consideration, although the Parent expects the market value of shares of
Parent Common Stock to diminish upon effecting the Distribution to reflect the
value (per share of Parent Common Stock) of the shares of Common Stock
distributed by the Parent.
The consummation of the Distribution will also remove current restrictions
on the Company's growth as a result of certain contractual restrictions of the
Parent that are applicable to the Parent and its subsidiaries. For example,
certain of the Parent's contractual relationships with manufacturers prevent
the Parent and its subsidiaries, including the Company, from selling such
manufacturers' computers and computer-related products at discounted prices,
which has prevented the Company from obtaining such products on a close-out or
refurbished basis and selling them in the Company's auctions. In addition,
under the Parent's contractual relationships with certain of its vendors,
neither the Parent nor its subsidiaries, including the Company, can sell the
vendor's products outside the U.S. As a result of the Distribution, the
Company would no longer be subject to these restrictions.
The Company believes that its capitalization after consummation of the
Offering will be sufficient to satisfy its future working capital, capital
expenditures and other obligations for at least the next 12 months. See "Risk
Factors--Future Capital Requirements; Need For Additional Capital; Absence of
Parent Funding."
23
<PAGE>
CONDITIONS TO THE DISTRIBUTION
The Company has received the PwC Opinion to the effect that the Distribution
will qualify as a tax-free distribution for federal income tax purposes under
Section 355 of the Code, and will not result in recognition of any gain or
loss for federal income tax purposes to the Parent, the Company, or the
Parent's or the Company's respective stockholders. The Parent also may apply
for a Letter Ruling.
In accordance with the Separation and Distribution Agreement, completion of
the Distribution will be subject to the satisfaction, or waiver by the Parent
Board, of the following conditions: (i) the PwC Opinion shall have been
obtained, in form and substance satisfactory to the Parent, and be confirmed
at the time of Distribution; (ii) if the Parent decides to seek a Letter
Ruling, the Letter Ruling shall have been obtained and remain effective
consistent with the conclusions reached in the PwC Opinion, and such ruling
shall be in form and substance satisfactory to the Parent, in its sole
discretion; (iii) any material Governmental Approvals and Consents (as such
terms are defined in the Separation and Distribution Agreement) necessary to
consummate the Distribution shall have been obtained and shall be in full
force and effect; (iv) no order, injunction or decree issued by any court or
agency of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Distribution shall be in effect, and no
other event outside the control of the Parent shall have occurred or failed to
occur that prevents the consummation of the Distribution; and (v) no other
events or developments shall have occurred subsequent to the closing of the
Offering that, in the judgment of the Parent Board, would result in the
Distribution having a material adverse effect on the Parent or on the
stockholders of the Parent. The Parent Board will have the sole discretion to
determine the Distribution Date at any time commencing after the Offering
Closing Date but in no event prior to 180 days after consummation of the
Offering. The Parent has agreed to consummate the Distribution, subject to the
satisfaction of the conditions set forth above. The Parent may terminate the
obligation to consummate the Distribution if the Distribution has not occurred
by December 31, 1999, unless extended by the Parent and the Company. In
addition, the Separation and Distribution Agreement may be amended or
terminated at any time prior to the Distribution Date by the mutual consent of
the Company and the Parent. See "Risk Factors--Risk of Noncompletion of a Tax-
Free Distribution" and "Certain Transactions."
24
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company, are estimated to be $18.8 million ($21.8 million if the
Underwriters exercise their over-allotment option in full) at an assumed
initial public offering price of $13.50 per share. The Company intends to use
approximately $15 million of such proceeds for its advertising and brand
development expenditures and for development of the Company's infrastructure
in order to support growth. The balance of the proceeds will be used for
general corporate purposes, including working capital. The Company may apply
an undetermined portion of the net proceeds toward the acquisition of
complementary businesses. The Company currently has no agreements or
understandings with respect to any such acquisition. Pending application, the
net proceeds will be invested in short-term, investment-grade, interest-
bearing obligations.
DIVIDEND POLICY
After the Offering Closing Date, the Company does not intend to pay cash
dividends on the Common Stock for the foreseeable future because it intends to
retain all earnings for use in the operation and expansion of the Company's
business. Furthermore, the Company's ability to declare or pay dividends may
be limited in the future by the terms of any then-existing credit facilities
which may contain covenants which restrict the payment of cash dividends.
25
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of September 30, 1998 and (ii) capitalization as adjusted to give effect to
the application of the estimated net proceeds to the Company from the Offering
(at an assumed initial public offering price of $13.50 per share). See "Use of
Proceeds" and "Description of Capital Stock." This table should be read in
conjunction with the financial statements and notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-----------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
Advances from the Parent.................................. $ 3,709 $ 3,709
Stockholders' equity (deficit) (1):
Preferred Stock, $.001 par value; 5,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common Stock, $.001 par value; 20,000,000 shares
authorized; 7,329,883 shares issued and outstanding,
actual;
8,909,883 shares issued and outstanding, as adjusted... 1 9
Additional paid-in capital.............................. -- 18,829
Accumulated deficit..................................... (3,293) (3,293)
------- -------
Total stockholders' equity (deficit).................. (3,292) 15,545
------- -------
Total capitalization.................................. $ 417 $19,254
======= =======
</TABLE>
- --------
(1) Excludes employee and director stock options of the Company to purchase an
aggregate of 869,690 shares of Common Stock of the Company outstanding as
of September 30, 1998 at a weighted average exercise price of $.71 per
share. All of the options granted are exercisable only in the event of an
initial public offering or a Sale or Merger (as defined in the option
agreement). The terms of the options provide for vesting, generally over a
five-year period, except for options to purchase 36,649 shares of Common
Stock which will vest on the Closing Date. However, assuming all options
are exercised, additional dilution to new stockholders would be
approximately $.09 per share. See "Management--Stock Options" and "Certain
Transactions--Tax Indemnification and Allocation Agreement." In addition,
upon completion of the Distribution, certain stock options exercisable for
shares of Parent Common Stock will be converted into stock options
exercisable for shares of Parent Common Stock and Common Stock. It is not
possible to specify how many shares of Common Stock will be subject to
such stock options, as it is not known how many stock options to purchase
Parent Common Stock will remain unexercised and outstanding by the record
date for the Distribution. However, based on the number of options to
purchase Parent Common Stock outstanding on September 30, 1998, options to
purchase 854,893 shares of Parent Common Stock would become options to
purchase 854,893 shares of Parent Common Stock and 612,017 shares of
Common Stock at an estimated weighted average exercise price of $4.40 per
share, based on the market price of Parent Common Stock at September 30,
1998 ($8.25) and the mid-point of the range of the estimated initial
public offering price of the Common Stock ($13.50). If these options are
exercised, further dilution to new investors will occur. As a result of
the Distribution, any options to purchase Parent Common Stock issued after
the Offering Closing Date will not be convertible into options to purchase
Common Stock. The Company may also issue additional shares of Common Stock
to effect future business acquisitions or upon exercise of future stock
option grants or equity awards, which could also result in additional
dilution to then-existing stockholders. See "Risk Factors--Limited Ability
to Issue Common Stock Prior to Distribution," "Management--Stock Options"
and "Certain Transactions--Separation and Distribution Agreement."
26
<PAGE>
DILUTION
The net tangible book value (deficit) of the Company's Common Stock as of
September 30, 1998 was ($3.3 million), or ($.45) net per share of Common
Stock. Net tangible book (deficit) value per share represents the amount of
the Company's total tangible assets less its total liabilities, divided by the
total number of shares of Common Stock outstanding.
After giving effect to the Offering and the receipt of an assumed $18.8
million of net proceeds from the Offering (based on an assumed initial public
offering price of $13.50 per share) the pro forma net tangible book value of
the Common Stock as of September 30, 1998 would have been approximately $15.5
million, or $1.74 per share. This amount represents an immediate increase in
net tangible book value of $2.19 per share to the existing stockholder and an
immediate dilution in net tangible book value of $11.76 per share to
purchasers of Common Stock in the Offering, as illustrated in the following
table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.50
Net tangible book value (deficit) per share as of September
30, 1998................................................... $(.45)
Increase per share attributable to new investors............ 2.19
-----
Pro forma net tangible book value per share after the
Offering..................................................... 1.74
------
Net tangible book value dilution per share to new investors... $11.76
======
</TABLE>
The following table summarizes on a pro forma basis as of September 30,
1998, the differences between the existing stockholder and new investors with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid to the Company and the average price per share
paid, at an assumed initial public offering price of $13.50 per share, before
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholder
(1).................... 7,329,883 82.3% $ 1,000 -- % $.0001
New investors........... 1,580,000 17.7 21,330,000 100.0 $13.50
--------- ----- ----------- -----
Total................. 8,909,883 100.0% $21,331,000 100.0%
========= ===== =========== =====
</TABLE>
- -------
(1) If the Underwriters' over-allotment option is exercised in full, sales by
the Company in the Offering will reduce the number of shares of Common
Stock held by the existing stockholder to approximately 80.1% of the total
shares of Common Stock outstanding after the Offering and will increase
the number of shares held by new investors to 1,817,000, or approximately
19.9% of the total shares of Common Stock outstanding after the Offering.
See "Underwriting."
The foregoing table excludes employee and director stock options of the
Company to purchase an aggregate of 869,690 shares of Common Stock of the
Company outstanding as of September 30, 1998 at a weighted average exercise
price of $.71 per share. All of the options granted are exercisable only in
the event of an initial public offering or a Sale or Merger (each as defined
in the option agreement). The terms of the options provide for vesting,
generally over a five-year period, except for options to purchase 36,649
shares of Common Stock which will vest on the Offering Closing Date. However,
assuming all options are exercised, additional dilution to new stockholders
would be approximately $.09 per share. In addition, upon completion of the
Distribution, certain stock options exercisable for shares of Parent Common
Stock will be converted into stock options exercisable for shares of Parent
Common Stock and Common Stock. It is not possible to specify how many shares
of Common Stock will be subject to such stock options, as it is not known how
many stock options to purchase Parent Common Stock will remain unexercised and
outstanding by the record date for the Distribution. However, based on the
number of options to purchase Parent Common Stock outstanding on September 30,
1998, options to purchase 854,893 shares of Parent Common Stock would become
options to purchase 854,893 shares of Parent Common Stock and 612,017 shares
of Common Stock at an estimated weighted average exercise price of $4.40 per
share, based on the market price of Parent Common Stock at September 30, 1998
($8.25) and the mid-point of the range of the estimated initial public
offering price of the
27
<PAGE>
Common Stock ($13.50). If these options are exercised, further dilution to new
investors will occur. As a result of the Distribution, any options to purchase
Parent Common Stock issued after the Offering Closing Date will not be
convertible into options to purchase Common Stock. The Company may also issue
additional shares of Common Stock to effect future business acquisitions or
upon exercise of future stock option grants or equity awards, which could also
result in additional dilution to then-existing stockholders. See "Risk
Factors--Limited Ability to Issue Common Stock Prior to Distribution,"
"Management--Stock Options" and "Certain Transactions--Separation and
Distribution Agreement."
28
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in the Prospectus. The statement of operations data for the
period from Inception through December 31, 1997 and for the nine months ended
September 30, 1998 and the balance sheet data as of December 31, 1997 and
September 30, 1998 are derived from financial statements of the Company that
have been audited by Ernst & Young LLP, independent auditors, and are included
elsewhere in this Prospectus. The data for the interim periods is not
necessarily indicative of results that may be expected for any other interim
period or for the year as a whole.
<TABLE>
<CAPTION>
INCEPTION
(APRIL 1, 1997) TO NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.......................... $ 9 $ 24,125
Cost of revenues...................... 8 22,192
--------- ---------
Gross profit.......................... 1 1,933
Operating expenses:
Sales and marketing................. 10 1,353
Technology and development.......... 66 694
General and administrative.......... 212 2,707
--------- ---------
Total operating expenses............ 288 4,754
--------- ---------
Loss from operations.................. (287) (2,821)
Interest expense...................... 26 159
--------- ---------
Loss before income taxes.............. (313) (2,980)
Provision for income taxes............ -- --
--------- ---------
Net loss.............................. $ (313) $ (2,980)
========= =========
Basic and diluted net loss per share
(1).................................. $ (0.04) $ (0.41)
========= =========
Shares used to compute basic and
diluted net loss per share (1)....... 7,329,883 7,329,883
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ -- $ --
Working capital................................. 31 (624)
Total assets.................................... 358 6,048
Advances from the Parent........................ 670 3,709
Total stockholder's deficit..................... (312) (3,292)
</TABLE>
- --------
(1) See Notes 1 and 7 of notes to the financial statements for an explanation
of the number of shares used in computing the amount of basic and diluted
net loss per common share. Additionally, see Note 5 of notes to the
financial statements for an explanation of the compensation expense the
Company will be required to incur in connection with certain employee and
director stock options granted prior to the Offering, including a non-
cash charge which the Company expects to incur in the fourth quarter of
1998.
The historical results of operations of the Company reflect an allocation of
a portion of the Parent's corporate general and administrative costs.
Following the Offering Closing Date, various corporate services will be
provided by the Parent to the Company based upon fees payable by the Company
to the Parent under a services agreement to be entered into between the
Company and the Parent. No pro forma adjustment has been made to reflect such
fees in lieu of the corporate general and administrative cost allocation, as
the difference would not be material. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto of the Company, a wholly-owned subsidiary of the
Parent. The historical financial information included in this Prospectus does
not necessarily reflect what the Company's financial condition and results of
operations would have been had the Company been operated as an independent
entity during the periods presented.
OVERVIEW
uBid is engaged in the retail sale of excess merchandise, including close-
out and refurbished products, utilizing an interactive online auction. The
Company currently specializes in selling brand name computer, consumer
electronics and home and leisure products over the World Wide Web to consumers
and small and medium-sized businesses. The Company was incorporated in
September 1997. Prior to the incorporation of the Company, the Parent,
beginning on April 1, 1997, funded certain startup and development activities.
During 1997, the Company's operating activities related primarily to
recruiting personnel, developing the computer infrastructure necessary to
conduct live auctions on the Internet, building an operating infrastructure
and establishing vendor relationships. From its first auction in December 1997
through September 30, 1998, the Company auctioned over 138,000 merchandise
units, registered over 120,000 users and recorded more than eight million
visits to its Website. In the month of September alone, the Company auctioned
approximately 38,000 merchandise units, registered over 21,000 users and
recorded approximately 1.9 million visits to its Website. The Company's net
loss of $2,980,000 for the first nine months of 1998 was principally due to
investments in infrastructure as the Company commenced sales operations. The
Company expects to continue to experience losses for the foreseeable future as
it continues to make significant investments in building its customer base and
operating infrastructure.
Prior to the Offering Closing Date, the Company has been a wholly-owned
subsidiary of the Parent. The Company was set up as a subsidiary with the
intention to function independently from the Parent. To date, the Company has
received services provided by the Parent, including administrative
(accounting, human resources, legal), warehousing and distribution (through
June 1998), Internet/telecom and joint marketing. In consideration for these
services, the Parent has charged the Company its costs related to these
services. Management believes that the amounts charged to the Company have
been no less favorable to the Company than costs the Company would have
incurred to obtain such services on its own or from unaffiliated third
parties. It is estimated that the Company will need to spend approximately
$1,250,000 in capital expenditures to establish itself as an independent
company. These expenditures will include warehouse and distribution equipment,
hardware and software for computer systems and furniture and fixtures. The
Company expects to fund its purchase of such capital equipment with working
capital (including the proceeds from the Offering).
Due to its dependence on the Parent for funding and certain services, the
Company's ability to grow has been constrained by the allocation of resources
made by the Parent. The Company's growth has also been constrained by its
inability to sell and ship products internationally due to contractual
restraints on the Parent and because it has been precluded from selling
certain lines of merchandise as a result of agreements to which the Parent is
subject.
The Company either purchases the merchandise outright ("purchased
inventory") or acquires the rights to sell the merchandise under consignment-
type relationships with vendors on a revenue sharing basis ("revenue
sharing"). In the case where the Company purchases the merchandise outright,
the Company bears both inventory and credit risk. When merchandise is acquired
on a revenue sharing basis, title to the inventory passes to the Company only
after the sale, the Company invoices the customer and bears the credit and
return risks. Under both types of transactions (purchased inventory or revenue
sharing), the Company recognizes the full sales amount as revenue upon
verification of the credit card transaction authorization and shipment of the
merchandise. In instances where the credit card authorization has been
received but the merchandise has not been shipped, the Company defers revenue
recognition until the merchandise is shipped. In the next three months, the
Company expects to begin offering credit to certain of its business customers
that have been pre-qualified as having appropriate credit ratings, and
accordingly, the Company will be required to manage the associated risks of
accounts receivable expansion and collection.
30
<PAGE>
The Company has an extremely limited operating history upon which to base an
evaluation of the Company and its business and prospects. The Company's
business and prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such
as electronic commerce. Although the Company has experienced significant
growth in revenue in the first nine months of operations, there can be no
assurance that the Company's revenue will continue at its current level or
rate of growth. The Company's revenue depends substantially upon the level of
auction activity on its Website. In addition, the Company has relatively low
gross margins and plans to increase its operating expenses significantly by
increasing the size of its staff, expanding its marketing efforts, purchasing
larger volumes of merchandise to be sold at auction and building a larger
infrastructure to support planned growth. To the extent that increases in
operating expenses precede or are not subsequently followed by increased
revenue, the Company's business, results of operations and financial condition
will be materially adversely affected. See "Risk Factors--Extremely Limited
Operating History."
Beginning in October 1997, the Company granted stock options to attract and
retain key employees. These options were exercisable only in the event of a
successful initial public offering or sale of the Company. Accordingly, the
Company will record a non-cash charge to compensation in the quarter in which
the Offering is consummated. Assuming the consummation of the Offering in
December 1998 and a $13.50 offering price, the Company will record a non-cash
compensation charge of approximately $11.7 million over the five-year vesting
period of such options. Based on those options that vest through November 16,
1998, a compensation expense of approximately $5.3 million will be recorded in
the fourth quarter of 1998. See Note 5 to the financial statements.
RESULTS OF OPERATIONS
Net Revenues. Net revenues are comprised of gross merchandise sales plus
shipping income net of returns. The Company held its first auction the last
week of December 1997. For the nine months ended September 30, 1998, net
revenues were $24,125,000. Net revenues grew from $157,000 in the month of
January 1998 to $5,819,000 in September 1998. Growth in net revenues was due
to significant growth in the Company's customer base, an expanded selection of
merchandise offered and an increase in the number of auctions per week. The
Company intends to increase traffic to its Website, further allowing it to
broaden its customer base, increase the number of auctions per week and expand
the selection and number of items offered.
Gross Profits. Gross profits are comprised of net revenues minus the cost of
merchandise, shipping and shipping-related expenses, net of returns. Gross
profits for the nine months ended September 30, 1998 were $1,933,000. Gross
profits increased in the first nine months primarily due to the increase in
revenues. As a percent of net revenues, the Company's gross margin was 8.0%
for the first nine months of 1998. Gross margin is affected by the Company's
ability to cost-effectively source merchandise and attract sufficient traffic
to the Company's Website to achieve a favorable balance between the number of
bidders and the amount of merchandise auctioned. Merchandise acquired from the
Parent represented over 90% of the merchandise sold in the first two months of
operations, decreased to approximately 30% in March and April 1998, and
represented less than 15% since May 1998.
Operating Expenses.
The Company's operating expenses have increased significantly since the
Company's Inception. This trend is expected to continue as the Company
continues to expand its operations to increase its customer base, enhance its
brand name and increase its market share, all of which will require
significant increases in marketing and advertising, additional personnel,
enhancements to its Website and further development of its infrastructure. To
date, the Parent has provided administrative (accounting, human resources,
legal), warehousing and distribution (through June 1998), Internet/telecom and
joint marketing services to the Company. The cost of these services
represented 72% and 30% of the Company's total operating expenses from
Inception to December 31, 1997 and for the first nine months of 1998,
respectively. It is expected that these costs will continue to decline as a
percent of total operating expenses and in absolute dollars after the
Offering.
Sales and Marketing. Sales and marketing expenses consist primarily of
advertising and promotional expenditures, as well as payroll and related
expenses for sales and marketing personnel. Sales and marketing
31
<PAGE>
expenses were $10,000 and $1,353,000 from Inception to December 31, 1997 and
for the first nine months of 1998, respectively. Sales and marketing expenses
as a percent of net revenues were 5.6% for the first nine months of 1998.
These expenses have increased significantly each month of operations due to
increasing advertising expenditures and personnel additions. The Company
expects sales and marketing expenses to increase significantly in absolute
dollars as it endeavors to increase its customer base. The Company has
established relationships with a number of online companies, such as AOL, CNET
and Wired Digital, to increase its access to online customers and build brand
recognition.
Technology and Development. Technology and development expenses consist
primarily of payroll and related expenses for systems personnel who develop
the Company's Website and related systems as well as charges from the Parent
relating to hosting of the Company's Website and Internet/telecom operations.
Technology and development expenses were $66,000 and $694,000 from Inception
to December 31, 1997 and for the first nine months of 1998. Technology and
development costs as a percent of net revenues were 2.9% for the first nine
months of 1998. In addition to the expenses in 1997, the Company capitalized
$267,000 relating to the development of the core software for the Website.
These costs will be amortized over three years. The increase in technology and
development expenses during 1998 was primarily attributable to increased
staffing and associated costs relating to enhancing the features and
functionality of the Company's Website and related systems. The Company
accounts for software development costs in accordance with SOP 98-1.
Accordingly, internal and external costs incurred to develop internal-use
computer software are expensed during the preliminary project stage and
capitalized during the application development stage and amortized over
three years. The Parent has been responsible for hosting the Company's Website
and for Internet/telecom operations. The Parent has charged the Company rates
that are no less favorable than that which could be obtained from a third
party.
General and Administrative. General and administrative expenses consist
primarily of credit card processing, payroll and related expenses, warehousing
and distribution, merchandising, customer service, accounting and
administration, executive and other general corporate expenses. General and
administrative expenses were $212,000 and $2,707,000 for the period from
Inception to December 31, 1997 and for the first nine months of 1998,
respectively. General and administrative expenses as a percent of net revenues
were 11.2% for the first nine months of 1998. The Parent supplied general and
administrative services for warehousing and distribution (through June 1998),
credit card processing, accounting and benefits administration. Although the
Parent will continue to supply certain general and administrative services to
the Company pursuant to the Separation and Distribution Agreement, the current
warehousing and distribution services conducted by the Parent were assumed by
the Company in July 1998 pursuant to a sublease agreement between the Company
and the Parent. The Parent charged the Company rates that were no less
favorable than what a third party would have charged. General and
administrative expenses have increased during 1998 primarily due to hiring
additional personnel and related costs to support increased sales such as
credit card processing and distribution costs. The Company expects general and
administrative expenses to increase in absolute dollars in the future as the
Company expands its operations.
Income Taxes. The Company records its income tax provision on a separate
return basis. The Company had a net loss since Inception in 1997 and expects
to incur losses for the forseeable future. No benefit for income taxes was
provided in 1997 or 1998 due to the uncertainty of realization of these
benefits in future years.
Net Loss. Based on the foregoing information, the Company had a net loss of
$313,000 and $2,980,000 for the period from Inception to December 31, 1997 and
for the nine months ended September 30, 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since Inception, the Company has financed its operations with advances from
the Parent and cash flow from operations. Net cash used in operating
activities were $340,000 and $2,224,000 for the period from Inception to
December 31, 1997 and for the first nine months of 1998, respectively. For
1997, the net cash used in operating activities was primarily attributable to
the net loss of $313,000. For the first nine months of 1998, the net cash
32
<PAGE>
used in operating activities was primarily due to the net loss of $2,980,000,
an increase in accounts receivable of $490,000, a net increase in inventory of
$4,496,000 partially offset by an increase in accounts payable of $4,760,000
and various accrued expenses of $871,000.
Cash flows used in investing activities were $331,000 and $75,000 for 1997
and the first nine months of 1998, respectively, for the capitalization of
software development. Total net cash used by the Company, which was advanced
by the Parent, was $670,000 and $3,038,000 for 1997 and the first nine months
of 1998, respectively.
The Company anticipates that it will have negative cash flows for the
foreseeable future. The Parent plans to advance the Company cash for its
operations until the consummation of the Offering. These advances bear
interest at the prime interest rate, which was 8.5% from Inception through
December 31, 1997 and the first nine months of 1998. Interest expense was
$26,000 and $159,000 for 1997 and the first nine months of 1998, respectively.
Net proceeds from the Offering will be used for working capital needs to
include advertising and brand development for growth, as well as development
of the Company's infrastructure. It is estimated that the Company will need to
spend approximately $1,250,000 in capital expenditures to establish itself as
an independent company. These expenditures will include warehouse and
distribution equipment, hardware and software for computer systems and
furniture and fixtures. The Company expects to fund its purchase of such
capital equipment with working capital (including the proceeds from the
Offering).
The Company believes that the net proceeds from the Offering and cash flow
from operations will satisfy the Company's working capital and capital
expenditure requirements for at least the next 12 months, although the Company
may seek to raise additional capital during that period. There can be no
assurance the Company will not require additional funds prior to the
expiration of such 12 month period. Even if such additional funds are not
required, the Company may seek additional equity or debt financing. There can
be no assurance that such financing will be available on acceptable terms, if
at all, or that such financing will not be dilutive to the Company's
stockholders.
YEAR 2000 SYSTEMS COSTS
Computer systems, software packages, and microprocessor dependent equipment
may cease to function or generate erroneous data when the year 2000 arrives.
The problem affects those systems or products that are programmed to accept a
two-digit code in date code fields. To correctly identify the year 2000, a
four-digit date code field will be required to be what is commonly termed
"year 2000 compliant."
The Company may realize exposure and risk if the systems for which it is
dependent upon to conduct day-to-day operations are not year 2000 compliant.
The potential areas of exposure include electronic data exchange systems
operated by third parties with whom the Company transacts business, certain
products purchased from third parties for resale, and computers, software,
telephone systems and other equipment used internally. To minimize the
potential adverse affects of the year 2000 problem, the Company has
established an internal project team comprised of all functional disciplines.
This project team has begun a three-phase process of identifying internal
systems (both information technology and non-information technology systems)
that are not year 2000 compliant, determining their significance in the
effective operation of the Company, and developing plans to resolve the issues
where necessary. The Company has been communicating with the suppliers and
others with whom it does business to coordinate year 2000 readiness. The
responses received by the Company to date have indicated that steps are
currently being undertaken to address this concern. However, if such third
parties are not able to make all systems year 2000 compliant, there could be a
material adverse impact on the Company.
Initial review of the Company's principal application software through which
nearly all of the Company's business is transacted has determined it to be
year 2000 compliant and, as such, the Company does not anticipate any material
adverse operational issues to arise. The Company plans to complete the year
2000 compliance assessment by the end of the first quarter 1999 and implement
corrective solutions before the end of the third quarter 1999. Although the
Company historically has shared certain costs with the Parent in connection
with its
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year 2000 compliance project, management currently estimates the costs
attributable to the Company with respect to this project to date total less
than $10,000. Based on current estimates, management expects that the
Company's future costs in connection with its year 2000 compliance project
will not exceed $70,000; however, future anticipated costs are difficult to
estimate with any certainty and may differ materially from those currently
projected based on the results of phase one of the Company's year 2000
project. The anticipated costs associated with the Company's year 2000
compliance program do not include time and costs that may be incurred as a
result of any potential failure of third parties to become year 2000 compliant
or costs to implement the Company's future contingency plans. The Company has
not yet determined a contingency plan in the event that any non-compliant
critical systems are not remedied by January 1, 2000, nor has it formulated a
timetable to create such contingency plan. Upon completion of this project, if
systems material to the Company's operations have not been made year 2000
compliant, or if third parties fail to make their systems year 2000 compliant
in a timely manner, the year 2000 issue could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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BUSINESS
THE COMPANY
uBid operates an online auction for excess merchandise, offering close-out
and refurbished products to consumers and small to medium-sized businesses.
The Company believes that its online auction represents an exciting sales
format for users that leverages the interactive nature of the Internet. The
Company's Internet auctions feature a rotating selection of brand name
computer, consumer electronics and home and leisure products which typically
sell at significant discounts to prices found at traditional retailers. uBid
currently runs auctions seven days a week, offering on the average over 1,000
total items in each of its auctions. From its first auction in December 1997
through September 30, 1998, the Company auctioned over 138,000 merchandise
units, registered over 120,000 users and recorded more than eight million
visits to its Website. In the month of September alone, the Company auctioned
approximately 38,000 merchandise units, registered over 21,000 users and
recorded approximately 1.9 million visits to its Website.
The Company operates in the rapidly growing Internet commerce industry.
Jupiter Communications estimates that U.S. retail consumer purchases of goods
and services over the Internet will increase from $2.6 billion in 1997 to
$37.5 billion in 2002. The single largest online retail category in the U.S.
is projected to be computers and consumer electronics, which is forecast to
grow from $836 million in 1997 to $10.5 billion by the year 2002. The personal
computer and consumer electronics markets are characterized by significant
quantities of excess merchandise due to extremely short product life cycles
and the prevalence of returned items through the consumer retail channel.
Because of the highly fragmented and relatively undeveloped liquidator
channel, prices received by vendors for excess goods tend to be highly
variable. The Company estimates that the value of such products exceeded $4
billion in 1997 in the U.S. alone.
uBid's online auctions provide an ideal distribution channel for
unpredictable, odd-lot quantities of close-out and refurbished goods. The
frequency of the Company's auctions and its ability to continuously add new
items allow vendors to dispose of inventory quickly to minimize the risk of
price erosion. Online sales also allow vendors to liquidate excess merchandise
directly to a nationwide audience, without cannibalizing their primary
distribution channels. Furthermore, uBid offers customers a unique retail
experience--the opportunity to set their own prices on popular, brand name
products with the convenience of shopping 24 hours a day, seven days a week.
The element of gamesmanship, combined with an ever-changing merchandise mix,
entices customers to participate in the auction in hopes of "hitting the
jackpot" and winning a bargain.
The Company employs sophisticated merchandising techniques to manage the
auction process, which allows the Company to maximize revenues on products put
into auction. uBid's sophisticated auction management methodology capitalizes
on the Company's direct marketing and merchandising expertise to help predict
the level of customer traffic to the Website, the appropriate product mix of
each auction and the ultimate price realized on each product.
The Company has designed its online auctions to offer a superior customer
experience and to encourage repeat visits by customers and potential
customers. The Company believes it offers a consistently superior experience
to its customers through an entertaining and fast auction process, tight
control of the order process and a high level of customer support.
Approximately 90% of the products shipped from the Company's warehouse are
shipped the next business day after an auction closes. In addition, uBid has
established multiple channels for communicating with customers before and
after the sale, including telephone, e-mail and online support. The Company
has also incorporated other features to encourage repeat visits, including a
personalized page with a user's bidding history. Repeat customers accounted
for approximately 68% of customer orders for the three months ended September
30, 1998.
In the electronic commerce industry, a strong brand is critical to creating
a high level of vendor awareness and attracting customer traffic. Accordingly,
the Company's strategy is to aggressively increase its visibility and brand
recognition through a variety of marketing and promotional efforts.
Specifically, the Company intends to
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increase points of access by establishing relationships with other online
companies similar to its existing relationships with AOL, CNET and Wired
Digital.
The Company obtains merchandise directly from computer, consumer electronics
and home and leisure products manufacturers and indirectly through other
vendors, such as retailers, distributors and Fortune 1000 companies.
Currently, this merchandise is sourced from over 100 vendors. uBid's
merchandise has included brands such as AST, AT&T, Aiwa, Apple, Canon, Casio,
Compaq, Dell, Gateway, Hewlett-Packard, IBM, JVC, Lexmark, Micron, NEC,
Panasonic, Seagate, Sony, Toshiba and Uniden.
INDUSTRY BACKGROUND
Growth of the Internet and the Web
The Internet and the Web are experiencing dramatic growth in terms of the
number of Web users. International Data Corporation ("IDC") estimates that at
the end of 1997 there were over 38 million Web users in the United States and
that by the end of 2002 the number of Web users in the United States will
increase to over 135 million. In addition, Web users are spending an
increasing amount of time on the Web, and a 1997 report issued by the U.S.
Department of Commerce contains an estimate that the overall traffic on the
Internet is doubling every 100 days. The growth in the number of Web users and
the amount of time users spend on the Web is being driven by the increasing
importance of the Internet as a communications medium and an information
resource and a sales and distribution channel.
Growth of Online Commerce
The Internet is dramatically affecting the methods by which consumers and
businesses are buying and selling goods and services. The Web provides online
merchants with the ability to reach a global audience and to operate with
minimal infrastructure, reduced overhead and greater economies of scale, while
providing consumers and businesses with a broad selection, increased pricing
power and unparalleled convenience. As a result, a growing number of parties
are transacting business on the Web, including trading securities, buying
consumer goods, paying bills and purchasing airline tickets. In addition, IDC
estimates that the percentage of U.S. Internet users buying goods and services
on the Internet is projected to grow from approximately 33% in December 1997
to 48% in December 2002. Additionally, Jupiter Communications estimates that
U.S. retail consumer purchases of goods and services over the Internet will
increase from $2.6 billion in 1997 to $37.5 billion in 2002. The single
largest online retail category is projected to be computers and consumer
electronics, which is forecast to grow from $836 million in 1997 to $10.5
billion by the year 2002 in the U.S. alone.
Market for Excess Computer Products and Consumer Electronics
Each year, vendors of computer products and consumer electronics, including
manufacturers, distributors, resellers and retailers, dispose of significant
volumes of excess merchandise, including close-out and refurbished
merchandise. Close-out merchandise includes overstocked or slow-moving new
products that have or will shortly become previous generation, typically due
to a change in selling seasons or the introduction of next generation software
or hardware. Refurbished products include products returned by the consumer to
the retailer or manufacturer. Refurbished products typically require a nominal
amount of service, such as minor repairs, cleaning and repackaging, and
installation of current versions of leading software prior to being sold as
refurbished goods.
The disposal of excess goods represents a substantial burden on many
vendors. Excess goods are currently sold through auction houses, catalogs,
company stores or "outlets," resellers and specialized retailers, as well as
large superstores and mass merchants that are not committed to the resale of
these goods and generally sell them as a supplementary product line or "loss
leader." Prices received by vendors for excess goods tend to be highly
variable and subject to negotiation based on quantity, age and condition of
the merchandise. In addition, since vendors lack control over product
placement these sales channels may compete with the vendor's more profitable,
primary sales channels.
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The personal computer and consumer electronics markets are characterized by
significant quantities of close-out and refurbished merchandise due to
extremely short product life cycles and the prevalence of returned items
through the consumer retail channel. The U.S. end market for computer hardware
and peripherals is estimated by IDC to grow from approximately $86.3 billion
in 1997 to approximately $112.7 billion in 2001. According to IDC, in the
United States, the total market for personal computers alone was estimated to
be greater than $70 billion in 1997. The Company estimates that the portion of
this market that became close-out and refurbished goods exceeded $4 billion in
1997 in the U.S. alone. The Company believes that vendors will look favorably
upon a distribution channel that enables them to dispose of significant
quantities of merchandise quickly and at the best prices possible, without
affecting their traditional sales channels.
THE uBID SOLUTION
The Company believes that its online marketplace represents an exciting
sales format for users that leverages the interactive nature of the Internet.
The Company's Internet auctions provide vendors with an efficient and
economical channel for disposing of excess merchandise and provide consumers
and small and medium-sized businesses with a convenient method for obtaining
such products at substantial savings.
VENDOR BENEFITS. The Company's online auctions provide manufacturers with an
ideal distribution channel for unpredictable, odd-lot quantities of close-out
and refurbished goods. The frequency of the Company's auctions and its ability
to continuously add new items allow vendors to dispose of inventory quickly to
minimize the risk of price erosion. In addition, online sales allow vendors to
liquidate excess merchandise directly to a nationwide audience, without
cannibalizing their primary distribution channels.
CUSTOMER BENEFITS. uBid offers customers a unique retail experience--the
opportunity to set their own prices on popular, brand name products with the
convenience of shopping 24 hours a day, seven days a week. With an average of
over 1,000 total items available in each auction, the Company's broad
selection of goods also sells at significant discounts to prices found at
traditional retailers. The element of gamesmanship, combined with an ever-
changing merchandise mix, entices customers to participate in the auction in
hopes of "hitting the jackpot" and winning a bargain.
BUSINESS STRATEGY
The Company's objective is to become the Internet auction site of choice for
vendors and consumers. The Company intends to achieve this objective by
pursuing the following key strategies:
. INCREASE BRAND AWARENESS. The Company operates in a market in which a
strong brand is critical to differentiating itself and attracting a high
level of vendor awareness and customer traffic. Accordingly, the
Company's strategy is to aggressively increase its visibility and brand
recognition through a variety of marketing and promotional techniques.
Specifically, the Company intends to increase points of access by
forming relationships with, and advertising on, leading Websites, such
as the Company's existing arrangements with AOL, CNET and Wired Digital.
Premier positioning on these sites not only drives traffic, but also
gives uBid credibility to users and vendors who are unfamiliar with the
Company. The Company also reinforces the uBid brand in users' minds by
employing consistent branding from the design of its Website to use of
distinctive uBid packaging.
. PROMOTE REPEAT VISITS. The Company has designed its Website to encourage
repeat visits by customers and potential customers, since each return
visit represents another selling opportunity for uBid. The Company
believes that its auction format and Website encourage bidders to return
on a frequent basis to determine the status of their bids relative to
others and ultimately to find out if they've won their bids for
merchandise. The regular rotation of merchandise also encourages
customers to revisit the site frequently. In addition, the Company
believes that its "My Page" feature, which allows a customer to track
his or her complete bidding history and quickly update customer
information, increases user loyalty. Repeat customers accounted for
approximately 68% of customer orders for the three months ended
September 30, 1998.
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. OFFER A SUPERIOR CUSTOMER EXPERIENCE. The Company believes it offers a
consistently superior experience to its customers through an
entertaining and fast auction process, tight control of the order
process and a high level of customer support. Every order is tracked at
each step in the process, from order placement to shipment. As a result
of uBid's strict inventory and shipping standards, approximately 90% of
products shipped from the Company's warehouse are shipped the next
business day after an auction closes, compared to competitors who take
up to three weeks to ship products from a variety of third-party sites
across the country.
Because the Company believes that customer support is an essential
component of the shopping experience and leads to increased customer
loyalty, uBid has established multiple channels for communicating with
its customers before and after the sale, including telephone, e-mail and
online support. In addition, the Company's automated systems continually
monitor and measure its customer service response times to ensure user
satisfaction.
. CONTINUE TO EMPLOY SOPHISTICATED MERCHANDISING TECHNIQUES. The Company's
sophisticated auction management methodology capitalizes on the
Company's direct marketing and merchandising expertise to help predict
the level of customer traffic to the Website, the appropriate product
mix of each auction and the ultimate price realized on each product. The
auction management model allows the Company to forecast the number of
visitors that will be derived from the Company's marketing and
advertising efforts and to maximize the flow of these visitors to the
site. Additionally, the model allows the Company to capture detailed
information concerning where, when, how and to whom product is sold and
shipped, helping the Company to predict customer preferences going
forward. The auction merchandising model allows the Company to maximize
revenues on products put into auction, by using a sophisticated
statistical software package to project the price at which each product
will ultimately be sold to consumers based on current traffic and
demand, and by determining what price to purchase products from over 100
vendors, the product mix, the number of products the Company should
auction on a given day to enable it to maximize its margins, and the
appropriate "add-on" and straight-sale merchandising opportunities.
. DEVELOP NEW REVENUE OPPORTUNITIES. The Company believes that significant
opportunities exist to develop new revenue opportunities by expanding
its lines of merchandise. Specifically, the Company expects to expand
its product mix by partnering with market leaders in various categories
that are well suited for the Company's online auction format. Although
the Company has focused primarily on the sale of computer products in an
effort to target and attract the "early adopters," as the Internet grows
and develops, the Company believes a broad array of categories of
merchandise can be sold effectively through its online auction format,
including any overstock products, limited source products and commodity-
type products for which pricing is highly competitive. In particular,
the Company has recently begun selling home and leisure products, such
as eyewear, breadmakers and cooktop appliances.
. INCREASE REVENUE SHARING ARRANGEMENTS WITH VENDORS. In order to reduce
the level of principal risk when the Company purchases products from
vendors for resale, the Company has entered into a number of revenue
sharing arrangements with vendors to split the sales proceeds on an
agreed-upon percentage basis. The Company believes these revenue sharing
arrangements provide margin upside for the vendors while also
guaranteeing gross margin percentage for the Company. As of
September 30, 1998, the Company had entered into 28 of these revenue
sharing agreements with vendors and expects to increase the number over
time.
THE uBID AUCTION
The Company has designed its attractive, fast, and easy-to-use Website to
provide a compelling shopping experience for the user through an interactive
auction format. Customers enter the auction at the uBid home page, which
displays a list of product categories and sub-categories and showcases the
auction's "best deals." Within
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a specific sub-category, uBid auctions a number of identical items at the same
time. The minimum opening bid for each item is generally $7. The product page
for each item features a concise product description, full-color image, and
detailed technical specifications. In addition, a table lists the quantity
available, the bid range, the minimum incremental bid, the current winning
bidders and the amount of their bids and the time of auction close.
To participate in the auction, a first-time bidder must complete the simple
electronic registration form found on the Website. The bidder is then given an
identification number and chooses a password. Once registered, the customer
can bid and buy at will in the same or future auctions. After a customer bids
on a product, the corresponding bidder list is instantly updated to reflect
the bid and the customer's new position in the list of bidders. At the
customer's option, he or she may elect to receive an e-mail when outbid or to
use agent bidding to automatically increase the bid to a predetermined maximum
dollar amount. These functions increase the likelihood that the user will
place an additional bid.
When the auction closes, the highest bidders win the available inventory at
their actual bid prices. Each winning bidder may pay a price that is different
from the prices paid by other winning bidders. When bidders' prices are equal,
bids for larger quantities and with earlier initial bid times prevail. Using
its proprietary software, uBid automatically determines the winning bidders
and sends an e-mail message to confirm their purchases the same day. After
being screened by the Company's anti-fraud software, the customer's credit
card is charged and the merchandise is shipped.
PRODUCTS AND MERCHANDISING
The Company offers on the average over 1,000 total items in each of its
auctions. Currently, the merchandise consists primarily of computers and
consumer electronics and has included brands such as AST, AT&T, Aiwa, Apple,
Canon, Casio, Compaq, Dell, Gateway, Hewlett-Packard, IBM, JVC, Lexmark,
Micron, NEC, Panasonic, Seagate, Sony, Toshiba and Uniden. For the quarter
ended September 30, 1998, the product mix based on revenues consisted of
approximately 52% new merchandise and 48% refurbished products. Regardless of
the source of the merchandise, most merchandise sold by the Company is
warranted by the manufacturer or refurbisher. The customer may purchase an
extended warranty provided by a third party, Independent Dealer Services,
Inc., in those states where such third-party warranties are permitted by law.
The Company believes that this extended warranty combined with the Company's
emphasis on customer service provide it with an advantage over its
competitors, which generally rely solely on the warranties provided by the
vendor.
The Company currently offers merchandise in the following categories:
Computer Products: Desktops, portable computers, computer accessories,
disk drives, modems, monitors/video equipment, components, printers,
scanners, digital cameras, software and home office products.
Consumer Electronics: Home theater equipment, home audio equipment,
speakers, televisions, camcorders, VCRs, DVD players, portable audio
players and automobile audio equipment.
Home and Leisure: Kitchen appliances, vacuum cleaners, personal care
devices, jewelry and sunglasses.
VENDOR RELATIONSHIPS
The Company obtains merchandise directly from computer and electronics
manufacturers and indirectly through other vendors, such as retailers,
distributors and Fortune 1000 companies. Currently, this merchandise is
sourced from over 100 vendors. The Company believes that it has substantial
access to additional sources of excess merchandise and is in a position to
leverage its existing relationships and add new vendors to increase the
breadth and number of products offered. Since merchandise availability can be
unpredictable, a strong base of vendor relationships is important to the
Company's success. See "Risk Factors--Reliance on Merchandise Vendors." As a
result, the Company's buying staff maintains ongoing contact with its vendors
to learn when new merchandise becomes available. The percentage of the
Company's revenues attributable to sales of products
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sourced from the Parent has declined from over 90% in the first two months of
operations to approximately 30% in March and April 1998 to less than 15% since
May 1998.
The Company directly purchases most of its products and holds them for
resale. By purchasing merchandise, the Company assumes the full inventory and
price risk involved in selling such merchandise. The Company believes its
ability to sell its inventory quickly through its auctions justifies the cost
of and risk involved in carrying inventory. The Company attempts to minimize
its exposure to inventory and price risk through its auction management model
that employs a sophisticated statistical software package to project the price
at which each product will ultimately be sold to consumers based on current
traffic and demand, and by determining at which price to purchase products
from vendors. In the event the Company is left with excess inventory, the
Company seeks to immediately dispose of such inventory through its auction
site. To date, the Company's exposure to excess inventory has not been
material.
REVENUE SHARING. The Company also has entered into revenue sharing
arrangements with several vendors to split the sales proceeds on an agreed-
upon percentage basis. The Company believes these revenue sharing arrangements
are attractive to vendors because it allows the vendor to potentially realize
more revenue than in the case where the Company purchases the merchandise for
a fixed price. The Company's avoidance of any inventory risk, unlimited margin
upside for the vendors and guaranteed gross margin percentage for the Company
make revenue sharing agreements an attractive arrangement to both the Company
and vendors. As of September 30, 1998, the Company had entered into 28 of
these revenue sharing agreements with vendors, and such agreements represented
less than 5% of the Company's revenue for the quarter ended September 30,
1998. The Company believes that the percentage of its revenues represented by
revenue sharing arrangements will continue to increase over the next 12
months.
SALES AND MARKETING
The Company sells to consumers and small and medium-sized businesses. To
achieve its objective of becoming the Internet auction site of choice for
vendors and consumers, the Company has developed a marketing strategy in order
to strengthen its brand name and increase customer traffic to its Website.
This marketing strategy consists of establishing relationships with leading
online companies, as well as employing a mix of media and promotional
activities to achieve these goals.
RELATIONSHIPS WITH LEADING ONLINE COMPANIES. uBid has established
relationships with a number of Internet service and content providers to
increase its access to online customers and to build brand recognition. The
Company intends to complement its existing relationships and establish a
leading brand name by pursuing additional agreements. See "Risk Factors--
Reliance on Relationships with Online Companies." Representative relationships
include:
. AOL. This relationship provides access to AOL's members through a premier
button (a fixed icon displaying the uBid logo, visible on the computer
screen without using the scroll button, which provides a direct link to
the Company's Website) in the Office Products Department of AOL's
Shopping Channel. Additionally, uBid's promotional banners (rectangular
graphic advertisements) rotate throughout the AOL Shopping Channel.
. CNET. uBid has an anchor position (i.e., a non-rotating, fixed
advertisement) on the home page of Computers.com, CNET's computer channel
designed to provide consumers with pertinent news and advice in
purchasing computer hardware and software.
. WIRED DIGITAL. uBid is a featured sponsor on the Computer Hardware
Channel of Wired's HotBot Shopping Directory. The Company receives
premier positioning within the Computer Hardware Channel along with a
link to its Website on the Directory home page under the Computer
Hardware listing. uBid also has promotional links within each of the
Auctions, Computer Software and Small Business Needs Channels, along with
banner ads circulating throughout the entire HotBot Shopping Directory.
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INTERNET ADVERTISING. The Company has taken a disciplined and selective
approach in its advertising strategy that primarily considers the costs of
customer acquisition. The Company attempts to maximize the return from
promotional expenditures by choosing advertising media based on the cost
relative to the likely audience and ability to generate increased traffic for
the Company's Website. The Company places advertisements on various high-
profile and high-traffic conduit Websites, including AOL, CNET, Excite, Yahoo!
and others, as well as Websites that are targeted at a more focused audience.
These advertisements usually take the form of banner ads that encourage
readers to click through directly to the Company's Website. In addition, the
Company and the Parent have reciprocal links on their Websites.
CUSTOMER ELECTRONIC MAIL BROADCASTS. The Company actively markets to its own
base of customers through e-mail broadcasts. All bidders in the Company's
auctions are automatically added to the Company's electronic mailing list,
which numbered over 120,000 registrants through September 30, 1998. The
Company currently sends more than 850,000 e-mail messages each month
announcing new items available at each auction, special products available,
site changes and new features. The Company has a strict policy of sending only
solicited e-mail, and a customer can remove his or her name from the Company's
mailing list at any time.
ORDER FULFILLMENT
The Company obtains products from its vendor network shortly before the
products are put into auction. Although most products are held in inventory at
the Company's distribution facility, in the case of refurbished products, the
products may be held at the refurbisher's facility and shipped directly to the
customer. However, the refurbisher is required to use uBid labeling and
packaging standards and transmit shipment information to the Company to
provide a uniform customer experience.
The product fulfillment process, from receipt of products through shipment,
is largely automated, enabling the Company to capture real-time data on
inventory receiving, shipping and stock levels. Approximately 90% of the
products shipped from the Company's warehouse are shipped the next business
day after an auction closes, and the Company's tight shipping controls have
historically kept shipping errors at negligible levels. The Company believes
that the speed and accuracy of its order fulfillment process reinforces and
enhances its customers' total purchase experience.
Pursuant to the Company's exclusive agreement with the Parent, the Company
has contracted its distribution functions to the Parent utilizing the Parent's
fully developed distribution infrastructure which, in 1997, was responsible
for the distribution of over one million orders of computer-related products.
In July 1998, the Company entered into a sublease currently covering 100,000
square feet of the Parent's 325,000 square foot distribution center in
Memphis, Tennessee. The sublease also provides for the Company's continued use
of the Parent's sophisticated inventory control and shipping systems during
the term of the sublease. This distribution arrangement enables uBid to
provide distribution services which the Company believes far exceed that of
the competition, who generally rely upon contract warehouses for the bulk of
their fulfillment and logistics requirements.
CUSTOMER SUPPORT AND SERVICE
The Company believes that its ability to establish and maintain long-term
relationships with its customers and encourage repeat visits and purchases is
dependent, in part, on the strength of its customer support and service
operations and staff. In contrast to most of the Company's competitors, uBid
has established multiple channels for communicating with its customers before
and after the sale, including phone, e-mail and online support. The Company
currently employs a staff of customer support and service personnel who are
responsible for handling customer inquiries, tracking shipments and
investigating problems with merchandise. While merchandise sold by the Company
is sold on an "as is" basis, products may be covered by manufacturers'
warranties or third party warranties purchased by the customer. The Company,
though not obligated to do so, may in specific instances accept merchandise
returns if a product is defective or does not conform to the specifications of
the item sold at auction, and attempts to work with its customers to resolve
complaints about merchandise. In addition, the Company has automated certain
of its customer service functions, including
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providing users of the Website with online access to information such as
product shipping status. The Company is committed to continue enhancing its
customer support and service operations, through a variety of measures
including improved customer reporting systems. See "Risk Factors--Reliance on
Merchandise Vendors" and "--Management of Potential Growth; New Management
Team."
TECHNOLOGY
The Company has implemented a broad array of customer support, transaction-
processing and fulfillment systems using a combination of both proprietary and
commercially available, licensed technologies. These systems are scalable and
secure and are designed to make both the customer experience and the
transaction reporting and tracking process as seamless and simple as possible,
with an emphasis on speed. The Company's hardware and software systems are
designed to integrate seamlessly and manage real-time transactions with
limited human intervention. The Company's current strategy is to license
commercially available technology wherever possible rather than seek
internally-developed solutions and to focus its internal software development
efforts on creating and enhancing the specialized, proprietary software that
is unique to its business. The Company's auction processing and auction
management applications discussed below are jointly owned, in perpetuity, by
the Parent and the third-party developers of the software pursuant to
agreements between the Parent and such third-party developers. The agreements
provide that the Parent and the third-party developers of the software jointly
own all patent, copyright and other proprietary rights with respect to the
Company's auction processing and auction management applications and certain
general purpose libraries (used for general website and Java software
development) which have been developed by the third-party developers and are
used with the auction processing and auction management applications. The
three agreements material to the Company's ownership rights in the software
are its agreement with David Matthews, the principal co-developer of the
software, a purchase agreement between the Parent and a co-developer relating
to certain general purpose libraries and an Assignment and License Agreement
between the Parent and the Company. Under the first agreement, the co-
developer of the Company's auction software system has granted the Parent (i)
joint ownership rights in the auction system software, related work product
and certain general purpose libraries developed by him prior to December 1997
and (ii) sole ownership rights to the software and related work product
developed for the Parent after December 1997. Under the software purchase
agreement with a second co-developer, the Parent was granted a joint ownership
interest in the general purpose libraries for web site or Java software
development used in the Company's on-line auction software to the extent
developed, owned and maintained by that developer. Under the Assignment and
License Agreement with the Parent, the Parent has assigned to the Company all
right, title and interest in the copyrights in (i) the on-line auction
software developed by the Parent's employees for the Company and (ii) the on-
line auction software developed for the Parent under the third-party developer
agreements described above. Under the Assignment and License Agreement, the
Company has granted to the Parent a perpetual, non-exclusive, transferable,
royalty-free license to those portions of the assigned software that are not
specific to the operation of the Company's current on-line auction system.
Modifications and enhancements to the Company's auction processing software,
auction management applications and general purpose libraries have been made
by employees of the Parent and the Company on a work-for-hire basis and are
the property of the Company.
AUCTION PROCESSING AND AUCTION MANAGEMENT APPLICATIONS. The Company uses a
set of automated software applications for receiving and validating bids,
registering bidders, placing customers on the Company's mailing list, listing
currently active and recent winning and losing bids and reviewing and
submitting customer service requests. The Company's internally-developed
proprietary auction management software continually tracks every bid posted on
all auctions and utilizes regression analysis to assist the Company in
determining the number of products to auction at any given time. The Company
believes that this system enables it to maximize margins in each product
category.
ORDER PROCESSING APPLICATIONS. The Company uses a set of applications for
processing successful bids as they are converted into customer orders. These
applications charge customer credit cards, print order information, transmit
order information electronically to the Company's contract warehouse and
vendors, and deposit transaction information into the Company's accounting
system. All credit card numbers and financial
42
<PAGE>
and credit information are secured using the Internet security protocol Secure
Socket Layer, Version 3, an encryption standard, and credit card numbers are
maintained behind appropriate fire walls. The software used is made available
through the Parent pursuant to the terms of the warehouse sublease between the
Parent and the Company.
MARKETING APPLICATIONS. The Company has developed a set of applications for
sending automated broadcast e-mails to customers on a frequent basis. This
software extracts e-mail addresses from the Company's mailing list, sends e-
mails to the designated recipients and automatically services requests from
customers to remove them from the mailing list.
SYSTEMS OPERATIONS
The continued uninterrupted operation of the Company's Website is critical
to its business, and the Company strives to maximize uptime of the Website.
The Company uses the services of Pacific Bell and other Internet service
providers to provide connectivity to the Internet over a dedicated DS-3 line.
IDT Corporation provides Internet traffic and data routing services to the
Company as well as e-mail services. MCI provides frame relay services for the
Company's back office operations. The Company believes that these
telecommunication and Internet service facilities are essential to the
Company's operation. The Pacific Bell, IDT Corporation and MCI Internet
access, traffic, data routing and e-mail services and frame relay services are
provided by such parties through agreements with the Parent and will be made
available to the Company after the Offering under the
Internet/Telecommunications Agreement with the Parent. See "Risk Factors--
Management of Potential Growth; New Management Team," "--Risk of System
Failure; Single Site" and "Certain Transactions--Internet/Telecommunications
Agreement."
The Company's hardware and software systems run in parallel on multiple
servers, which allows the system to balance the workload among the servers.
The system also includes redundant hardware on mission critical components,
which the Company believes would enable it to survive a potential failure of
any server with minimal downtime. In addition, capacity can be quickly and
easily expanded by adding additional servers, without incurring significant
development costs. In particular, the Company strives to maintain access to
its Website and speed of use during the most heavily trafficked times of day--
the evening hours around the time scheduled for auction close. In order to do
this, the Company anticipates expanding its system as usage increases to avoid
any decrease in system response time. The Company pays the Parent for use of
hardware systems that are located in Torrance, California. Prior to the
Offering Closing Date, the Company and the Parent intend to enter into an
agreement pursuant to which the Parent will continue to provide the Company
with certain Internet and telecommunications services, including the related
hardware systems. The Company currently is in discussions with a leading
hosting provider to colocate the Company's servers and to develop a mirrored
site location. Although the Company anticipates continuing to use the Parent's
hardware systems for the near term, within one year following the Offering,
the Company intends to purchase its own hardware and software systems, at an
estimated cost of approximately $500,000. The Company expects to fund its
purchase of such capital equipment with working capital (including the
proceeds from the Offering). See "Certain Transactions--
Internet/Telecommunications Agreement."
INSURANCE COVERAGE
Through the date of the Distribution, the Company will be covered by the
insurance policies maintained by the Parent. As of September 30, 1998, the
Parent maintained, among other types of coverage, a commercial liability
policy with an aggregate limit of $27 million, including a $25 million
umbrella policy, and a transit cargo policy with a limit of $1.5 million, a
workers compensation policy with a limit of $1 million and blanket crime
coverage with a limit of $2 million. Following the Distribution, the Company
will be required to obtain its own insurance.
COMPETITION
The electronic commerce market is new, rapidly evolving and intensely
competitive, and the Company expects competition to intensify in the future.
The Company currently or potentially competes with a variety of
43
<PAGE>
other companies depending on the type of merchandise and sales format offered
to customers. These competitors include: (i) various Internet auction houses
such as ONSALE, eBay, Yahoo! Auctions, First Auction (the auction site for
Internet Shopping Network, a wholly-owned subsidiary of Home Shopping Network
Inc.), Surplus Auction (a wholly-owned subsidiary of Egghead, Inc.),
WebAuction (the auction site for MicroWarehouse, Inc.) and Insight Auction
(the auction site for Insight Enterprises, Inc.); (ii) a number of indirect
competitors that specialize in electronic commerce or derive a substantial
portion of their revenue from electronic commerce, including Internet Shopping
Network, AOL and Cendant Corp.; (iii) a variety of other companies that offer
merchandise similar to that of the Company but through physical auctions and
with which the Company competes for sources of supply; (iv) personal computer
manufacturers that have their own direct distribution channels for their
excess inventory or refurbished products; and (v) companies with substantial
customer bases in the computer and peripherals catalog business, including CDW
Computer Centers, Inc., PC Connection, Inc. and the Parent, some of which
already sell online or may devote more resources to Internet commerce in the
future. In particular, ONSALE, Inc. began conducting auctions on the Internet
in May 1995 and has established significant market share and brand name
recognition for online auctions for computer-related equipment. In addition,
AOL has taken a minority equity interest in Bid.com (formerly Internet
Liquidators International, Inc.), a competitor of the Company, and announced
that the two companies have formed a strategic partnership under which revenue
from Bid.com's auction platforms is shared with AOL and AOL provides a direct
link for Bid.com's members to reach Bid.com's electronic commerce site on the
Web.
The Company believes that the principal competitive factors affecting its
market are the ability to attract customers at favorable customer acquisition
costs, operate the Website in an uninterrupted manner and with acceptable
speed, provide effective customer service and obtain merchandise at
satisfactory prices. Although the Company believes that it currently competes
favorably with respect to such factors, there can be no assurance that the
Company can maintain its competitive position against current and potential
competitors, especially those with greater financial, marketing, customer
support, technical and other resources than the Company.
Current and potential competitors have established or may establish
cooperative relationships among themselves or directly with vendors to obtain
exclusive or semi-exclusive sources of merchandise. Accordingly, it is
possible that new competitors or alliances among competitors and vendors may
emerge and rapidly acquire market share. In addition, manufacturers may elect
to liquidate their products directly. Increased competition is likely to
result in reduced operating margins, loss of market share and a diminished
brand franchise, any one of which could materially adversely affect the
Company's business, results of operations and financial condition. Many of the
Company's current and potential competitors have significantly greater
financial, marketing, customer support, technical and other resources than the
Company. As a result, such competitors may be able to secure merchandise from
vendors on more favorable terms than the Company, and they may be able to
respond more quickly to changes in customer preferences or to devote greater
resources to the development, promotion and sale of their merchandise than can
the Company. See "Risk Factors--Competition."
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's performance and ability to compete are dependent to a
significant degree on its proprietary technology. The Company relies on a
combination of trademark, copyright and trade secret laws, as well as
confidentiality agreements and non-compete agreements executed by each manager
and technical measures to establish and protect its proprietary rights. The
uBid/SM/ service mark is registered in the United States. There can be no
assurance that the Company will be able to secure significant protection for
its service marks or trademarks. It is possible that competitors of the
Company or others will adopt product or service names similar to "uBid" or
other service marks or trademarks of the Company, thereby impeding the
Company's ability to build brand identity and possibly leading to customer
confusion. The inability of the Company to protect the name "uBid" adequately
could have a material adverse effect on the Company's business, results of
operations and financial condition. The Company's proprietary software is
protected by copyright laws. The source code for the Company's proprietary
software also is protected under applicable trade secret laws. All patent,
copyright and other proprietary rights with respect to the Company's auction
processing and auction management applications and certain general purpose
libraries are co-owned by the Company and the third-party developers of such
applications and libraries pursuant to various agreements among such third-
party developers and the Parent
44
<PAGE>
which the Parent has assigned to the Company. As part of its confidentiality
procedures, the Company generally enters into agreements with its employees
and consultants and limits access to and distribution of its software,
documentation and other proprietary information. There can be no assurance
that the steps taken by the Company will prevent misappropriation of its
technology or that agreements entered into for that purpose will be
enforceable. Notwithstanding the precautions taken by the Company, it might be
possible for a third party to copy or otherwise obtain and use the Company's
software or other proprietary information without authorization or to develop
similar software independently. Policing unauthorized use of the Company's
technology is difficult, particularly because the global nature of the
Internet makes it difficult to control the ultimate destination or security of
software or other data transmitted. The laws of other countries may afford the
Company little or no effective protection of its intellectual property.
The Company may in the future receive notices from third parties claiming
infringement by the Company's software or other aspects of the Company's
business. While the Company is not currently subject to any such claim, any
future claim, with or without merit, could result in significant litigation
costs and diversion of resources including the attention of management, and
require the Company to enter into royalty and licensing agreements, which
could have a material adverse effect on the Company's business, results of
operations and financial condition. Such royalty and licensing agreements, if
required, may not be available on terms acceptable to the Company or at all.
In the future, the Company may also need to file lawsuits to enforce the
Company's intellectual property rights, to protect the Company's trade secrets
or to determine the validity and scope of the proprietary rights of others.
Such litigation, whether successful or unsuccessful, could result in
substantial costs and diversion of resources, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company also relies on a variety of technologies that it licenses from
third parties, including its database and Internet server software, which is
used in the Company's Website to perform key functions. There can be no
assurance that these third-party technology licenses will continue to be
available to the Company on commercially reasonable terms. The loss or
inability of the Company to maintain or obtain upgrades to any of these
technology licenses could result in delays in completing its proprietary
software enhancements and new developments until equivalent technology could
be identified, licensed or developed and integrated. Any such delays would
materially adversely affect the Company's business, results of operations and
financial condition. See "Risk Factors--Protection of Intellectual Property."
EMPLOYEES
As of September 30, 1998, the Company employed 49 people and 49 full-time
equivalent contract personnel related to the Company's distribution center and
call center. None of the Company's employees is represented by a labor union,
and the Company considers its employee relations to be good. Competition for
qualified personnel in the Company's industry is intense, particularly for
software development and other technical staff. The Company believes that its
future success will depend in part on its continued ability to attract, hire
and retain qualified personnel. See "Risk Factors--Management of Potential
Growth; New Management Team" and "--Dependence on Key Personnel; Need for
Additional Personnel."
FACILITIES
The Company's principal administrative, engineering, merchandising and
marketing facilities total approximately 4,000 square feet, and are located in
Elk Grove Village, Illinois under leases that are shared with the Parent and
expire in 2002. The Company anticipates taking additional adjacent space under
its existing lease and expanding into that space in the near future to
accommodate expected growth. Since Inception, the Company has been dependent
upon the Parent for warehousing and distribution services. In July 1998, the
Company became responsible for its own warehousing and distribution and
entered into a sublease for 100,000 square feet of the Parent's 325,000 square
foot distribution center in Memphis, Tennessee. The sublease provides for the
Company's continued use of the Parent's sophisticated inventory control and
shipping systems during the term of the sublease. The sublease is at a monthly
rate equal to the Parent's obligation to the landlord, plus taxes and
utilities, and will expire in 2002. The Company believes that it has adequate
space for its current needs. As the Company expands, it expects that suitable
additional space will be available on commercially reasonable terms, although
no assurance can be made in this regard. The Company does not own any real
estate.
45
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, key employees and directors of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gregory K. Jones............ 37 Chairman, President and Chief Executive Officer
Thomas E. Werner............ 41 Vice President and Chief Financial Officer
George Lu................... 34 Vice President--Information Systems
Timothy E. Takesue.......... 30 Vice President--Merchandising
David L. Hirschman.......... 35 Senior Vice President--Operations
Joel D. Ludvigsen........... 32 Director of Auction Planning
David M. Matthews........... 29 Director of Applications Development
Brian A. Williams........... 29 Director of Marketing
Frank F. Khulusi............ 32 Director
Howard A. Tullman........... 54 Director
Norman H. Wesley............ 48 Director
</TABLE>
GREGORY K. JONES. Mr. Jones has been President and Chief Executive Officer
of the Company since November 1997, and Chairman of the Board since July 1998.
Prior thereto, from October 1995 to November 1997, Mr. Jones was Senior Vice
President of Strategic Markets at APAC TeleServices, Inc., a provider of
outsourced telephone-based marketing, sales and customer management solutions.
Prior thereto, from October 1990 to October 1995, Mr. Jones served as the
President and Chief Operating Officer of The Reliable Corporation/Office 1, a
Chicago-based direct mail/retailer of office products. Before that, from
January 1988 to October 1990, Mr. Jones was a Senior Manager, consulting on
systems and technology strategic planning for the accounting/consulting firm
of Ernst & Young LLP. He sits on the Board of Directors of Ohio-based D.I.Y.
Home Warehouse, an operator of 16 warehouse-format home improvement centers,
and of E-Sport, an Internet sports content company. Mr. Jones received his
B.A. degree from Miami University (Ohio) and his M.M. in marketing and finance
from the J.L. Kellogg Graduate School of Management of Northwestern
University.
THOMAS E. WERNER. Mr. Werner has been Vice President and Chief Financial
Officer of the Company since October 1998. From December 1995 to October 1998,
Mr. Werner was Corporate Controller for Gateway, Inc., a manufacturer and
marketer of personal computers and related products. From March 1995 until
December 1995, Mr. Werner was Vice President and Assistant Corporate
Controller for Dade International, a manufacturer of medical diagnostic
equipment and products. From 1989 until 1995, Mr. Werner held various
financial management positions with Baxter International, a manufacturer and
distributor of health care products. Mr. Werner received his B.S. degree in
Business from Indiana University and is a Certified Public Accountant.
GEORGE LU. Mr. Lu has been Vice President--Information Systems of the
Company since February 1998. Prior thereto, from March 1994 to January 1998,
Mr. Lu was employed by Rand McNally & Company, most recently in the position
of technical development manager for Rand McNally New Media and TDM. Prior
thereto, from March 1993 to March 1994, Mr. Lu was with AECOM Corp. as a
senior systems analyst. Mr. Lu received his B.S. degree from Huazhong
University, currently known as Central China Normal University, and his M.S.
degree from the University of Memphis.
TIMOTHY E. TAKESUE. Mr. Takesue joined uBid as Vice President--Merchandising
in December 1997. Prior to December 1997, Mr. Takesue was Director of
Merchandising/Purchasing for Elek-Tek Inc., a catalog, retail and corporate
reseller. Mr. Takesue was a buyer of computer and computer-related products
and accessories at Montgomery Ward from March 1996 to August 1996 and from
February 1988 to March 1996, Mr. Takesue held several positions with Fretter,
Inc., a specialty retailer in appliances, consumer electronics and computers.
During his eight years with that company, Mr. Takesue held the positions of
General Store Manager, District Sales Manager of Indiana, Marketing Manager of
the Ohio region with responsibility for all marketing functions, Regional
Marketing Manager for the New England region, Merchandise Manager with
responsibility for all
46
<PAGE>
buying and marketing of computer peripheral, software and accessory products,
and Senior Merchandise Manager with responsibility for all buying and
marketing of computer and related products. Mr. Takesue attended Wayne State
University.
DAVID L. HIRSCHMAN. Mr. Hirschman has been the Company's Senior Vice
President--Operations since April 1997. Prior thereto, Mr. Hirschman served as
Vice President of Marketing Operations at the Parent from August 1996 to March
1997, as Vice President of the Macintosh Marketing Division of the Parent from
May 1996 to July 1996, and from June 1993 to April 1996 as the Vice President
of Product Management at the Parent with responsibility for purchasing,
inventory maintenance and vendor relations. From 1990 to 1993, Mr. Hirschman
was the Purchasing Manager for Sun Computers, a large regional computer
reseller. Mr. Hirschman holds a B.S. degree in business from Washington
University in St. Louis.
JOEL D. LUDVIGSEN. Mr. Ludvigsen joined uBid as Director of Auction Planning
in November 1998. From 1996 to 1998, Mr. Ludvigsen served in the Strategic
Management Consulting department at Bain & Company. From 1988 to 1994, Mr.
Ludvigsen was a manager in the Audit Information Technology Group at KPMG Peat
Marwick. Mr. Ludvigsen is a Certified Public Accountant, and received a B.A.,
summa cum laude, at Luther College and a M.B.A., with Baker Scholar
distinction, at Harvard Graduate School of Business Administration.
DAVID M. MATTHEWS. Mr. Matthews joined uBid as Director of Applications
Development in January 1998. Mr. Matthews was a principal of Intier Corp., a
software development company focusing on object-oriented systems development,
from April 1997 to February 1998. Prior thereto, Mr. Matthews developed online
systems for Web developer Inspired Arts of San Diego LLP, intranet database
systems for Sequana Therapeutics, dial-up systems for VideoTex, Inc. and large
scale NeXT STEP/UNIX development projects at Abbott Labs and SAIC. Mr.
Matthews received his B.S. degree in computer science from the University of
California, San Diego.
BRIAN A. WILLIAMS. Mr. Williams joined uBid as Director of Marketing in
September 1997. From August 1996 to September 1997, Mr. Williams led the
online advertising and promotions department for the online games start-up,
Engage Games Online. From February 1994 to August 1996, Mr. Williams served as
a full-time interactive media consultant for Toyota Motor Sales, USA, working
on the launch of their online and interactive products including the Toyota
Website. Mr. Williams attended California State University, Fullerton.
FRANK F. KHULUSI. Mr. Khulusi has been a director of the Company since its
incorporation, acted as its President until November 1997, and acted as
Chairman of the Board from the Company's incorporation to July 1998. Mr
Khulusi is a co-founder of the Parent and has served as Chairman of the Board,
President and Chief Executive Officer of the Parent since 1987. Mr. Khulusi
attended the University of Southern California.
HOWARD A. TULLMAN. Mr. Tullman joined the Board of Directors in June 1998.
Since June 1997, Mr. Tullman has served as the Chief Executive Officer of
JAMtv Corporation, which operates an Internet music site specializing in the
webcasting of live music events. From October 1996 to May 1997, Mr. Tullman
was one of the co-managers of Digital Entertainment Networks LLC, the
predecessor to JAMtv Corporation. From October 1993 to September 1996, Mr.
Tullman served as the President and Chief Executive Officer of Imagination
Pilots, Inc., a multimedia software developer which he also founded.
Immediately prior to founding Imagination Pilots, Inc., Mr. Tullman served as
the Chief Executive Officer of Eager Enterprises, Inc., an information
industry venture capital firm which he founded in 1990. Mr. Tullman received
his B.A. degree from Northwestern University and a J.D. from the Northwestern
University School of Law.
NORMAN H. WESLEY. Mr. Wesley became a member of the Board of Directors of
the Company in November 1998. Beginning on January 1, 1999, Mr. Wesley will
become President, Chief Operating Officer and a member of the Board of
Directors of Fortune Brands, Inc., a consumer products company with premier
brands and leading markets in home and office products, golf equipment and
distilled spirits. Mr. Wesley currently serves as Chairman and Chief Executive
Officer of Fortune Brands Home & Office, the consolidated operation of ACCO
World Corporation and MasterBrands Industries, Inc. Mr. Wesley joined ACCO in
1984 as Vice
47
<PAGE>
President, Corporate Development, became President and Chief Operating Officer
of that company in 1987 and Chief Executive Officer in 1990. From 1997 through
December 31, 1998, Mr. Wesley will also have served as Chairman and Chief
Executive Officer of MasterBrands Industries, Inc. Mr. Wesley earned both a
B.S. in finance, cum laude, and a M.B.A., magna cum laude, from the University
of Utah.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Company's Bylaws provide that the number of members of the Company's
Board of Directors shall be determined by the Board of Directors. The number
of directors is currently four. The Board of Directors is divided into three
classes, with each class to be as nearly equal in number as possible. At each
annual meeting of stockholders, the successors to the class of directors whose
term expires at that time will be elected to hold office for a term of three
years and until their respective successors are elected and qualified. The
terms of office will expire at the Company's annual meeting in the year
indicated: Gregory K. Jones--2001; Howard A. Tullman and Norman H. Wesley--
2000; and Frank F. Khulusi--1999. The Company intends to appoint an additional
outside director, in addition to Messrs. Tullman and Wesley (collectively, the
"Outside Directors"), within the next six months. Neither Mr. Tullman nor Mr.
Wesley is, and the additional Outside Director will not be, employed by the
Company nor affiliated with the Parent. All of the officers identified above
serve at the discretion of the Board of Directors of the Company.
Upon the Offering Closing Date, the Company intends to establish three
committees: the Executive Committee, the Audit Committee, and the Compensation
Committee.
The Executive Committee will have full authority to exercise all the powers
of the Board between meetings of the Board, except as reserved by the Board.
The Executive Committee will not have the power to elect or remove executive
officers, approve a merger of the Company, recommend a sale of substantially
all of the Company's assets, recommend a dissolution of the Company, amend the
Certificate of Incorporation or Bylaws, declare dividends on the Company's
outstanding securities, or, except as authorized by the Board, issue any
Common Stock or preferred stock. Effective upon the Offering Closing Date,
Messrs. Jones and Khulusi will be appointed as the members of the Executive
Committee.
The Audit Committee will have the power to oversee the retention,
performance and compensation of the independent public accountants for the
Company, and the establishment and oversight of such systems of internal
accounting and auditing control as it deems appropriate. Messrs. Tullman and
Wesley will serve as the members of the Audit Committee.
The Compensation Committee will review and approve the compensation of
executive officers of the Company, including payment of salaries, bonuses and
incentive compensation, determine the Company's compensation philosophy and
programs, and administer the Company's stock option plans. Mr. Tullman and one
of the Outside Directors, to be appointed following the Offering, will serve
as the members of the Compensation Committee.
The Board of Directors does not have a nominating committee. However, the
Board of Directors will consider nomination recommendations from stockholders,
which should be addressed to the Company's secretary at its principal
executive offices.
48
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
Immediately following the Offering Closing Date, the base salaries and
bonuses of the Named Officers (as defined below) will be at levels determined
by the Parent. Subsequent to the Distribution, the base salaries and bonuses
of all executive officers of the Company will be determined by the
Compensation Committee of the Company.
The following tables set forth certain compensation information with respect
to the Company's Chief Executive Officer and its executive officers and key
employees during the period from Inception to December 31, 1997 (collectively,
the "Named Officers"). All of the information set forth in this table reflects
compensation earned by such individuals for services with the Company. The
Company had no other executive officers whose salary and bonus exceeded
$100,000 in 1997 or whose current salary exceeds $100,000 per annum.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
1997 ANNUAL COMPENSATION ------------
------------------------------- SECURITIES 1998
OTHER ANNUAL UNDERLYING ALL OTHER ANNUAL
NAME AND PRINCIPAL POSITION (1) SALARY($) BONUS($) COMPENSATION OPTIONS COMPENSATION($) SALARY($) (2)
- ------------------------------- --------- -------- ------------ ------------ --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Jones
Chairman, President and
Chief Executive Officer....... 19,519 -- -- 366,494 -- 175,000
Thomas E. Werner
Vice President and Chief
Financial Officer (3)......... -- -- -- -- -- 160,000
George Lu
Vice President--Information
Systems (3)................... -- -- -- -- -- 120,000
Timothy E. Takesue
Vice President--Merchandising. 16,076 20,000 -- 54,974 -- 96,000
David L. Hirschman
Sr. Vice President--
Operations (4)................ 69,560 -- -- -- -- 152,000
Joel D. Ludvigsen
Director of Auction
Planning (3).................. -- -- -- -- -- 60,000
David M. Matthews
Director of Applications
Development (3)............... -- -- -- -- -- 95,000
Brian A. Williams
Director of Marketing......... 15,600 -- -- 7,330 -- 57,000
</TABLE>
- -------
(1) Frank Khulusi, the Chairman of the Board, President and Chief Executive
Officer of the Parent, served as President and Chief Executive Officer of
the Company until November 1997. In addition, Richard M. Finkbeiner, the
former Chief Financial Officer of the Parent, served as the Chief
Financial Officer of the Company from Inception through September 21,
1998. Neither Mr. Khulusi nor Mr. Finkbeiner received any compensation
from the Company in 1997. However, the compensation paid by the Parent to
Mr. Khulusi in 1997 consisted of salary of $395,266, a cash bonus of
$25,000 and an option to purchase 100,000 shares of Parent Common Stock
with an exercise price of $7.125 per share. Mr. Finkbeiner's compensation
from the Parent consisted of salary of $233,063, a cash bonus of $94,653,
relocation expenses and allowances paid by the Company in an aggregate
amount of $15,246 and an option to purchase 20,000 shares of Parent
Common Stock with an exercise price of $7.125 per share. All compensation
paid to Messrs. Khulusi and Finkbeiner was for services provided to the
Parent, and no allocation was made for services provided to the Company
by these individuals.
(2) Figures are based on annualized salary, excluding bonus, if any.
(3) Messrs. Lu, Matthews, Werner and Ludvigsen joined the Company in 1998.
(4) Prior to joining the Company, Mr. Hirschman was employed by the Parent
and received for his services to the Parent in 1997 a salary of $70,369,
a cash bonus of $18,336 and an option to purchase 24,600 shares of Parent
Common Stock with an exercise price ranging from $5.50 to $6.00 per
share.
49
<PAGE>
OPTION GRANTS DURING 1997
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM (1)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
- ---- ---------- ------------- -------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Jones........ 366,494 80% $0.27 2007 $ 62,231 $ 157,706
Timothy E. Takesue...... 54,974 12 0.27 2007 9,335 23,656
Brian A. Williams....... 7,330 2 0.27 2007 1,245 3,154
</TABLE>
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997 (2)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gregory K. Jones............ -- 366,494 $ -- $ --
Thomas E. Werner............ -- -- -- --
George Lu................... -- -- -- --
Timothy E. Takesue.......... -- 54,974 -- --
David L. Hirschman.......... -- -- -- --
Joel D. Ludvigsen........... -- -- -- --
David M. Matthews........... -- -- -- --
Brian A. Williams........... -- 7,330 -- --
</TABLE>
- --------
(1) Assumes appreciation at the independently appraised value of the Common
Stock of 5% and 10% per year over the ten-year option period as mandated
by the rules and regulations of the Securities and Exchange Commission,
and does not represent the Company's estimate or projection of the future
value of the Common Stock. If the assumed initial offering price per
share of $13.50 had been used to calculate potential realizable value,
instead of the independently appraised value, appreciation at an assumed
annual rate of 5% and 10% would have resulted in values of approximately
$3.6 million and $9.2 million, respectively. The actual value realized
may be greater or less than the potential realizable values set forth in
the table.
(2) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1997 ($0.27 per
share as determined by the Stock Option Committee of the Board of
Directors based, among other factors, upon the limited operating history
and revenues of the Company, the operating losses of the Company, the
market value per share of Parent Common Stock and the portion of the
Parent's business represented by the Company) and the exercise price of
the Named Officer's option.
COMPENSATION OF DIRECTORS
Mr. Tullman and Mr. Wesley were each granted an option to purchase 18,325
shares of Common Stock, at an exercise price of $6.82 and $11.79,
respectively, per share, in connection with their becoming directors of the
Company. The Company currently intends to grant options to purchase shares of
Common Stock to all non-employee directors of the Company under the 1998 Stock
Incentive Plan. See "--Stock Options." Other than as will be provided in such
Plan and the reimbursement of reasonable expenses incurred with attending
Board and Committee meetings, the Company has not yet adopted specific
policies on directors' compensation and benefits following the Offering
Closing Date.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Gregory K. Jones,
President and Chief Executive Officer of the Company. The agreement with Mr.
Jones is terminable by Mr. Jones upon 30 days prior
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<PAGE>
written notice or by the Company at any time. Pursuant to this agreement, Mr.
Jones receives base salary in the amount of $175,000, subject to increase or
decrease by mutual agreement or pursuant to the Board of Directors' annual
review policy and budgeting procedures. Mr. Jones is also eligible to receive
annual bonuses, at the sole discretion of the Board, up to a current maximum
annual amount of $50,000.
If the agreement is terminated prior to October 22, 2000, Mr. Jones will
receive an amount equal to six months of his base compensation as severance,
and he will continue to receive health benefits for six months after such
termination.
Pursuant to his employment agreement, Mr. Jones was granted an option to
purchase 366,494 shares of Common Stock at an exercise price of $0.27 per
share. See "--Other Stock Options."
In addition to Mr. Jones' employment agreement as described above, Thomas
Werner, Vice President and Chief Financial Officer of the Company, and David
Hirschman, Senior Vice President--Operations of the Company, have the right to
receive three months salary if their employment is terminated by the Company.
STOCK OPTIONS
1998 STOCK INCENTIVE PLAN
The Company's 1998 Stock Incentive Plan (the "1998 Stock Incentive Plan")
was adopted by the Board of Directors and the Parent, as sole stockholder, in
August 1998. The purpose of the 1998 Stock Incentive Plan is to attract and
retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to employees, directors and
consultants of the Company and its subsidiaries and to promote the success of
the Company's business. The 1998 Stock Incentive Plan provides for the
granting to employees of incentive stock options within the meaning of Section
422 of the Code and the granting of nonstatutory stock options, stock
appreciation rights, dividend equivalent rights, restricted stock, performance
units, performance shares, and other equity-based rights ("Awards") to
employees, directors and consultants of the Company. Initially 1,832,470
shares of Common Stock are reserved for issuance under the 1998 Stock
Incentive Plan. Commencing January 2, 2000, the number of shares of Common
Stock reserved for issuance under the 1998 Stock Incentive Plan will be
increased by a number equal to 3% of the number of shares of Common Stock
outstanding as of December 31 of the immediately preceding calendar year,
provided that the number of shares of Common Stock available for grant of
incentive stock options shall be 476,442 shares, and such number shall not be
subject to adjustment as described above. Where the Award agreement permits
the exercise or purchase of the Award for a certain period of time following
the recipient's termination of service with the Company, disability, or death,
the Award will terminate to the extent not exercised or purchased on the last
day of the specified period or the last day of the original term of the Award,
whichever occurs first. To date, no Awards have been granted under the 1998
Stock Incentive Plan.
With respect to Awards granted to directors or officers, the 1998 Stock
Incentive Plan is administered by the Board of Directors or a committee
designated by the Board of Directors constituted to permit such Awards to be
exempt from Section 16(b) of the Securities Exchange Act of 1934, as amended,
in accordance with Rule 16b-3 thereunder. With respect to Awards granted to
other participants, the 1998 Stock Incentive Plan is administered by the Board
of Directors or a committee designated by the Board of Directors. In each
case, the Board of Directors or such committees (the "Plan Administrator")
shall determine the provisions, terms and conditions of each Award, including,
but not limited to, the Award vesting schedule, repurchase provisions, rights
of first refusal, forfeiture provisions, form of payment (cash, shares of
Common Stock, or other consideration) upon settlement of the Award, payment
contingencies and satisfaction of any performance criteria. Incentive stock
options are not transferable by the optionee other than by will or the laws of
descent or distribution, and each incentive stock option is exercisable during
the lifetime of the optionee only by such optionee. Other Awards shall be
transferable to the extent provided in the agreement evidencing the Award. The
exercise price of incentive stock options must be at least equal to the fair
market value of the Common Stock on the date of grant, and the term of the
option must not exceed ten years. The term of other Awards will be determined
by the Plan Administrator. With respect to an employee who owns stock
possessing more than 10%
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of the voting power of all classes of the Company's outstanding capital stock,
the exercise price of any incentive stock option must equal at least 110% of
the fair market value of the Common Stock on the grant date and the term of
the option must not exceed five years. The exercise or purchase price of other
Awards will be such price as determined by the Plan Administrator. The
consideration to be paid for the shares of Common Stock upon exercise or
purchase of an Award will be determined by the Plan Administrator and may
include cash, check, shares of Common Stock, a promissory note, or the
assignment of part of the proceeds from the sale of shares acquired upon
exercise or purchase of the Award.
In the event of an acquisition of the Company through the sale of all or
substantially all of its assets, a merger or other business combination in
which the Company is not the surviving entity ("Corporate Transaction"),
outstanding Awards under the 1998 Stock Incentive Plan, except as otherwise
provided in a specific Award Agreement, terminate unless assumed by the
successor company or its parent; provided that all outstanding but unvested
options will become fully vested, and all restricted stock will be released
from any forfeiture restrictions, immediately prior to the effective date of
the Corporate Transaction.
Unless terminated sooner, the 1998 Stock Incentive Plan will terminate
automatically in 2008. The Board has the authority to amend, suspend or
terminate the 1998 Stock Incentive Plan subject to stockholder approval of
certain amendments and provided no such action may affect Awards previously
granted under the 1998 Stock Incentive Plan.
OTHER STOCK OPTIONS
Prior to the Offering, the Company granted nonqualified options to key
employees of the Company to purchase Common Stock. Pursuant to such option
program as of September 30, 1998, options to purchase 869,690 shares of the
Company's Common Stock were granted to such key employees at a weighted
average purchase price of $.71 per share. These options have expiration dates
ranging from 2007 to 2008, provided that an option will terminate following 90
days after cessation of employment (other than for death or disability) and
following one year after cessation of employment for death or disability.
The options vest at a rate of 20% per year, except that, in the case of
options granted to Messrs. Hirschman and Matthews, employees of the Company,
the first 20% installment will vest on the Offering Closing Date. Upon a
merger, sale of substantially all of the assets or similar transaction
involving the Company that results in a change of control ("Change of
Control"), Mr. Jones' option will become fully vested. In the case of the
other options, upon a Change of Control, the next 20% installment of the
option will vest (the "Accelerated Installment") along with a prorated amount
of any additional number of unvested shares covered by the option calculated
by (x) subtracting the number of full months remaining until the normal annual
vesting date of the Accelerated Installment from 12, (y) dividing the
difference by 12 and (z) multiplying the resulting fraction times the number
of shares covered by the next 20% installment. Notwithstanding the vesting
described above, no option will be exercisable until the earlier of (i) the
Distribution Date or (ii) 18 months following the Offering Closing Date.
The following table shows, as of November 16, 1998, with respect to each of
the Named Officers of the Company holding an option granted pursuant to the
Company's informal stock option program, the number of shares covered by the
option and the exercise price of such option.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL SHARES SUBJECT
OR PERSONS IN GROUP TO OPTIONS GRANT DATE(S) EXERCISE PRICE
------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
Gregory K. Jones.............. 366,494 10/22/97 $0.27
Thomas E. Werner.............. 109,948 10/19/98 8.87
George Lu..................... 73,298 1/20/98; 3/30/98 0.27
Timothy E. Takesue............ 73,298 12/10/97; 3/30/98 0.27
David L. Hirschman............ 109,948 1/8/98 0.27
Joel D. Ludvigsen............. 32,984 11/2/98 11.79
David M. Matthews............. 73,298 1/22/98 0.27
Brian A. Williams............. 16,492 12/11/97; 7/6/98 0.27; 11.79
</TABLE>
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<PAGE>
401(k) PLAN
Currently, the Company's employees participate in the Parent's 401(k)
Savings and Retirement Plan. The Services Agreement to be entered into by the
Company and the Parent will provide that, for the lesser of (i) one year after
the Distribution or (ii) until such time as the Company establishes its own
401(k) plan, the Company's employees will continue to participate in the
Parent's 401(k) plan. See "Certain Transactions--Services Agreement." The
Company intends to adopt its own 401(k) Savings and Retirement Plan in the
future that is intended to qualify for preferential tax treatment under
section 401(k) of the Code ("401(k) Plan"). Although the Company has not yet
adopted the specific terms of the 401(k) Plan, the Company intends that most
of the employees of the Company will be eligible to participate in the 401(k)
Plan upon adoption.
OWNERSHIP OF PARENT COMMON STOCK BY THE COMPANY'S DIRECTORS AND EXECUTIVE
OFFICERS
No present or future officer or director currently owns any shares of Common
Stock, all of which are currently owned by the Parent. Upon consummation of
the Distribution, such directors and officers will receive shares of Common
Stock in respect of shares of Parent Common Stock held by them on the record
date for the Distribution. The following table sets forth the number of shares
of Parent Common Stock beneficially owned on September 30, 1998 by each of the
Company's directors, the Named Officers and all directors and Named Officers
of the Company as a group. Except as otherwise noted, the individual director,
director nominee or executive officer or their family members had sole voting
and investment power with respect to such securities. Percentages of shares
beneficially owned are based upon 10,238,703 shares of Parent Common Stock
outstanding at September 30, 1998, plus for each person named below any shares
of Parent Common Stock that may be acquired by such person within 60 days of
such date upon exercise of outstanding stock options or warrants.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED
---------------------
NAME NUMBER PERCENT
---- ----------- ---------
<S> <C> <C>
Gregory K. Jones....................................... -- --
Thomas E. Werner....................................... -- --
George Lu.............................................. -- --
Timothy E. Takesue..................................... -- --
David L. Hirschman (1)................................. -- --
Joel D. Ludvigsen...................................... -- --
David M. Matthews...................................... -- --
Brian A. Williams...................................... -- --
Frank F. Khulusi (2)................................... 1,816,875 17.7%
Howard A. Tullman...................................... 1,000 *
Norman H. Wesley....................................... -- --
All directors and Named Officers as a group (11
persons).............................................. 1,816,875 17.7%
</TABLE>
- --------
* Less than 1%
(1) Mr. Hirschman holds options to purchase 17,600 shares of Parent Common
Stock the unvested portion of which will be forfeited upon consummation of
the Offering in accordance with the negotiated terms of Mr. Hirschman's
initial employment with the Company.
(2) The aggregate amount of Parent Common Stock beneficially owned by Mr.
Khulusi includes 47,215 shares covered by options which are exercisable
within 60 days of September 30, 1998.
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<PAGE>
CERTAIN TRANSACTIONS
The following includes brief summaries of the anticipated provisions of the
Separation and Distribution Agreement and each of the Services Agreement, the
Tax Indemnification and Allocation Agreement, the Joint Marketing Agreement
and the Internet/Telecommunications Agreement (collectively, the "Ancillary
Agreements"), each between the Company and the Parent. The summaries of such
agreements are qualified in their entirety by such agreements, copies of which
will be filed as exhibits to the Registration Statement of which this
Prospectus is a part.
HISTORICAL INTERCOMPANY RELATIONSHIPS
Prior to the Offering Closing Date, the Company has been a wholly-owned,
indirect subsidiary of the Parent. As a wholly-owned subsidiary, the Company
has received various services provided by the Parent, including administration
(accounting, human resources, legal), warehousing and distribution (through
June 1998), Internet/telecom and joint marketing. The Parent has also provided
the Company with the services of a number of its executives and employees. In
consideration for these services, the Parent has historically allocated a
portion of its overhead costs related to such services to the Company.
Management of the Company believes that the amounts allocated to the Company
have been no less favorable to the Company than the expenses the Company would
have incurred to obtain such services on its own or from unaffiliated third
parties. None of these services have been provided to the Company pursuant to
any written agreement between the Company and the Parent.
SEPARATION AND DISTRIBUTION AGREEMENT
The Parent has announced that, subject to satisfaction of certain
conditions, the Parent intends to distribute to its stockholders no sooner
than 180 days after the consummation of the Offering all of the Common Stock
of the Company owned by the Parent at that time. The Separation and
Distribution Agreement to be entered into between the Company and the Parent
will set forth certain agreements among the Company and the Parent, with
respect to the principal corporate transactions required to effect the
Separation, the Offering and the Distribution, and certain other agreements
governing the relationship among the parties thereafter.
THE OFFERING. The Separation and Distribution Agreement provides that the
Company shall consummate the Offering. On the Offering Closing Date, the
Parent will own 7,329,883 of the outstanding shares of Common Stock, which
will represent approximately 82.3% of the voting power of all the outstanding
shares of Common Stock (80.1% if the Underwriters exercise their over-
allotment option in full).
THE DISTRIBUTION. The Separation and Distribution Agreement provides that,
subject to the terms and conditions thereof, the Parent and the Company will
take all reasonable steps necessary and appropriate to cause all conditions to
the Distribution to be satisfied and to effect the Distribution. The Parent
Board will have the sole discretion to determine the Distribution Date at any
time commencing 180 days after the Offering Closing Date and ending on or
prior to December 31, 1999. The Parent has agreed to consummate the
Distribution promptly but in no event prior to 180 days after consummation of
the Offering, subject to the satisfaction, or waiver by the Parent Board, of
the following conditions:
(i) the PwC Opinion shall have been obtained, in form and substance
satisfactory to the Parent, and be confirmed at the time of Distribution;
(ii) if the Company decides to seek a Letter Ruling, the Letter Ruling
shall have been obtained, and shall continue in effect, to the effect that,
among other things, the Distribution will qualify as a tax-free
distribution for federal income tax purposes under Section 355 of the Code
and the Distribution by the Parent of Common Stock to stockholders of the
Parent will not result in recognition of any income, gain or loss for
federal income tax purposes to the Parent or the Parent's stockholders, and
such ruling shall be in form and substance satisfactory to the Parent, in
its sole discretion;
(iii) any material governmental approvals and third party consents
necessary to consummate the Distribution shall have been obtained and be in
full force and effect;
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<PAGE>
(iv) no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Distribution shall be in effect, and no other event
outside the control of the Parent shall have occurred or failed to occur
that prevents the consummation of the Distribution; and
(v) no other events or developments shall have occurred subsequent to the
Offering Closing Date that, in the sole judgment of the Parent Board, would
result in the Distribution having a material adverse effect on the Parent
or on the stockholders of the Parent.
The Company and the Parent have agreed that, after the Offering Closing
Date, none of the parties will take, or permit any of its affiliates to take,
any action which reasonably could be expected to prevent the Distribution from
qualifying as a tax-free distribution to the Parent and the Parent's
stockholders pursuant to Section 355 of the Code. The parties have also agreed
to take any reasonable actions necessary in order for the Distribution to
qualify as a tax-free distribution to the Parent and the Parent's stockholders
pursuant to Section 355 of the Code. Without limiting the foregoing, after the
Offering Closing Date and prior to the Distribution Date, the Company will not
issue or grant, directly or indirectly, any shares of its capital stock or any
rights, warrants, options or other securities to purchase or acquire (whether
upon conversion, exchange or otherwise) any shares of its capital stock
(whether or not then exercisable, convertible or exchangeable).
REGISTRATION RIGHTS. The Separation and Distribution Agreement will provide
that the Parent, and Messrs. Frank and Sam Khulusi, holders of approximately
18% and 19%, respectively of Parent Common Stock, will have the right in
certain circumstances, but in no event prior to 180 days after the Offering
Closing Date (in the case of the Parent) and 180 days after the Distribution
(in the case of Messrs. Frank and Sam Khulusi), to require the Company to use
its best efforts to register for resale shares of Common Stock held by them
under the Securities Act of 1933, as amended ("1933 Act"), subject to certain
conditions, limitations and exceptions. The Company also will agree with the
Parent and Messrs. Frank and Sam Khulusi that if the Company files a
registration statement for the sale of securities under the 1933 Act, then
such persons may, subject to certain conditions, limitations and exceptions,
include in such registration statement shares of Common Stock held by them. In
addition, for an additional 90 days after the applicable 180-day period, the
Company will be entitled to include its shares in any requested Demand
Registration and to reduce the number of shares to be sold by the Parent or
Messrs. Frank and Sam Khulusi thereunder to a minimum of 20%, collectively, of
the total offering plus the amount of any underwriters' over-allotment option.
In the case of Messrs. Frank and Sam Khulusi, the Company will bear up to
$100,000 of the cost of the first, and up to $50,000 of the second, requested
registrations and will bear the cost of all piggyback registrations. In
addition, the Parent's registration rights will terminate upon consummation of
the Distribution.
RELEASES AND INDEMNIFICATION. The Separation and Distribution Agreement
provides for a full and complete release and discharge as of the Offering
Closing Date of all liabilities, known or unknown, existing or arising from
all acts and events occurring or failing to occur or alleged to have occurred
or to have failed to occur and all conditions existing or alleged to have
existed on or before the Offering Closing Date, between the Company and the
Parent (including any contractual agreements or arrangements existing or
alleged to exist between them on or before the Offering Closing Date), except
as expressly set forth in the Separation and Distribution Agreement.
Except as provided in the Separation and Distribution Agreement, the Company
has agreed to indemnify, defend and hold harmless the Parent and each of the
Parent's directors, officers and employees from and against all liabilities
relating to, arising out of or resulting from: (i) the failure of the Company
or any other person to pay, perform or otherwise promptly discharge any
liabilities of the Company in accordance with their respective terms; (ii) any
breach by the Company of the Separation and Distribution Agreement or any of
the Ancillary Agreements; and (iii) any untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, with respect to all information contained
in this Prospectus or the Registration Statement of which it forms a part.
Except as provided in the Separation and Distribution Agreement, the Parent
has agreed to indemnify, defend and hold harmless the Company and each of the
Company's directors, officers and employees from and
55
<PAGE>
against all liabilities relating to, arising out of or resulting from: (i) the
failure of the Parent or any other person to pay, perform or otherwise
promptly discharge any liabilities of the Parent other than the liabilities of
the Company; and (ii) any breach by the Parent of the Separation and
Distribution Agreement or any of the Ancillary Agreements. Neither the Company
nor the Parent is obligated under the Separation and Distribution Agreement to
indemnify the other for: (i) any liability, contingent or otherwise, assumed,
transferred, assigned or allocated to the other under the Separation and
Distribution Agreement or any Ancillary Agreement; (ii) any liability for the
sale, lease, construction or receipt of goods, property or services purchased,
obtained or used in the ordinary course of business between the parties prior
to the Offering Closing Date; (iii) any liability for unpaid amounts for
products or services or refunds owing on products or services due on a value-
received basis for work done by one party at the request or on behalf of the
other; (iv) any liability that the Company or the Parent may have with respect
to indemnification or contribution pursuant to the Separation and Distribution
Agreement for claims brought against other party by third persons; or (v)
generally, any liability the release of which would result in the release of
any person other than a person released pursuant to the Separation and
Distribution Agreement.
The Separation and Distribution Agreement contains provisions that govern,
except as otherwise provided in any Ancillary Agreement, the resolution of
disputes, controversies or claims that may arise between or among the parties.
These provisions contemplate that efforts will be made to resolve disputes,
controversies and claims by escalation of the matter to senior management (or
other mutually agreed) representatives of the parties. If such efforts are not
successful, any party may submit the dispute, controversy or claim to
mandatory, binding arbitration, subject to the provisions of the Separation
and Distribution Agreement. The Separation and Distribution Agreement contains
procedures for the selection of a sole arbitrator of the dispute, controversy
or claim and for the conduct of the arbitration hearing, including certain
limitations on discovery rights of the parties. These procedures are intended
to produce an expeditious resolution of any such dispute, controversy or
claim.
In the event that any dispute, controversy or claim is, or is reasonably
likely to be, in excess of $5 million, or in the event that an arbitration
award in excess of $5 million is issued in any arbitration proceeding
commenced under the Separation and Distribution Agreement, subject to certain
conditions, any party may submit such dispute, controversy or claim to a court
of competent jurisdiction and the arbitration provisions contained in the
Separation and Distribution Agreement will not apply. In the event that the
parties do not agree that the amount in controversy is in excess of $5
million, the Separation and Distribution Agreement provides for arbitration of
such disagreement.
NONCOMPETITION; CERTAIN BUSINESS TRANSACTIONS. The Separation and
Distribution Agreement provides that, for a period of nine months after the
Distribution Date, the Parent will not directly or indirectly, including by
way of acquisition of other companies, engage in the Internet online auction
business in substantially the same manner and format as conducted by the
Company on the date of the Separation and Distribution Agreement (the "Company
Business"). The Separation and Distribution Agreement also provides for the
allocation of certain corporate opportunities following the Offering Closing
Date and prior to the Distribution Date. During this period, neither the
Company nor the Parent will have any duty to communicate or offer such
opportunities to the other and may pursue or acquire any such opportunity for
itself or direct such opportunity to any other Person. Except as otherwise
contemplated under the intercompany agreements, it is anticipated that all
contracts between the Company and the Parent after consummation of the
Offering will be at arms length. See "Risk Factors--No Duty to Communicate
Corporate Opportunities."
EXPENSES. The Company has agreed to pay all third-party costs, fees and
expenses relating to the Offering, all of the reimbursable expenses of the
Underwriters pursuant to the Purchase Agreement (as defined below), all of the
costs of producing, printing, mailing and otherwise distributing this
Prospectus, as well as the Underwriters' discount as provided in the Purchase
Agreement. See "Underwriting." Except as expressly set forth in the Separation
and Distribution Agreement or in any Ancillary Agreement, whether or not the
Distribution is consummated, each party shall bear its own respective third-
party fees, costs and expenses paid or incurred in connection with the
Distribution.
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<PAGE>
TERMINATION. The Separation and Distribution Agreement may be terminated at
any time prior to the Distribution Date by the mutual consent of the Parent
and the Company, or by the Parent at any time prior to the Offering Closing
Date; however, it shall be a condition to the Offering hereby that the
Separation and Distribution Agreement remains in full force and effect on the
Offering Closing Date. If the Separation and Distribution Agreement is
terminated prior to the Offering Closing Date, no party thereto (or any of its
respective directors or officers) will have any liability or further
obligation to any other party. In the event of any termination of the
Separation and Distribution Agreement on or after the Offering Closing Date,
only the provisions of the Separation and Distribution Agreement that obligate
the parties to pursue the Distribution, or take, or refrain from taking,
actions which would or might prevent the Distribution from qualifying for tax-
free treatment under Section 355 of the Code, will terminate and the other
provisions of the Separation and Distribution Agreement and each Ancillary
Agreement will remain in full force and effect.
SERVICES AGREEMENT
Prior to the Offering Closing Date, the Company and the Parent intend to
enter into a services agreement (the "Services Agreement") pursuant to which
the Parent will provide to the Company various administrative services,
including general accounting services, credit services and payroll and
benefits administration.
GENERAL ACCOUNTING SERVICES. Pursuant to the Services Agreement, the Parent
will provide uBid with accounts payable services and general ledger services.
The services will be provided on a cost-plus 10% basis. This portion of the
Services Agreement may be cancelled by either party on 90 days prior written
notice and may be renewed by mutual agreement of the parties.
CREDIT SERVICES. The Services Agreement will also provide for the provision
by the Parent to uBid of credit services, including full credit checking and
analysis at a cost to uBid of $1.50 per transaction. The Parent will undertake
to use its best efforts to process each credit check within 24 hours of
receipt of the Company's request. This portion of the Services Agreement may
be cancelled by either party on 90 days prior written notice and may be
renewed by mutual agreement of the parties.
PAYROLL AND BENEFITS ADMINISTRATION. During a transition period for the
lesser of (i) one year or (ii) until such time as the Company establishes its
own 401(k) plan, the Parent will administer uBid's payroll and uBid's
employees will continue to be covered under the Parent's health insurance plan
and will continue to participate in the Parent's 401(k) plan. The Company will
reimburse the Parent for all payroll and benefits costs, and the Parent will
receive a monthly servicing fee on a cost-plus 10% basis per covered or
participating employee. This portion of the Services Agreement may be
cancelled by either party on 90 days prior written notice and may be renewed
by mutual agreement of the parties.
Payments pursuant to the Service Agreement shall be made monthly in arrears
within 30 days after the Company's receipt of an invoice detailing the
services rendered. The Company believes that the fees for services to be
provided under the Services Agreement will be no less favorable to the Company
than could have been obtained by the Company from unaffiliated third parties.
The Services Agreement will have an initial term of one year and may be
cancelled at any time at the option of either the Company or the Parent upon
90 days prior written notice. Following the initial term, the Company may seek
to renew or extend the term or to modify the scope of the services to be
provided by the Parent under the Services Agreement.
Any services rendered to the Company by the Parent beyond the services to be
provided under the terms of the Services Agreement that the Parent determines
are not covered by the fees provided for under the terms of the Services
Agreement will be billed to the Company as described in the Services
Agreement, or on such other basis as the Company and the Parent may agree,
provided that the price payable by the Company for non-covered services will
be established on a negotiated basis which is no less favorable to the Company
than the charges for comparable services from unaffiliated third parties.
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<PAGE>
TAX INDEMNIFICATION AND ALLOCATION AGREEMENT
Prior to the Offering Closing Date, the Company and the Parent intend to
enter into a Tax Indemnification and Allocation Agreement, which will provide
that if any one of certain events occurs, and such event causes the
Distribution not to be a tax-free transaction to the Parent under Section 355
of the Code, then the Company will indemnify the Parent for income taxes the
Parent may incur by reason of the Distribution not so qualifying under the
Code (the "Distribution Taxes"). Such events include any breach of
representations relating to the Company's activities and ownership of its
capital stock made to the Parent or to the IRS in connection with the
solicitation of a Letter Ruling. In connection with the Distribution and the
Letter Ruling, the Company will likely make certain representations to the IRS
regarding its intentions at the time of the Distribution with respect to its
business.
The Tax Indemnification and Allocation Agreement will also provide that the
Parent will indemnify the Company for Distribution Taxes for which the Company
has no liability to the Parent under the circumstances described above.
In addition to the foregoing indemnities, the Tax Indemnification and
Allocation Agreement will provide for: (i) the allocation and payment of taxes
for periods during which the Company and the Parent are included in the same
consolidated group for federal income tax purposes or the same consolidated,
combined or unitary returns for state tax purposes; (ii) the allocation of
responsibility for the filing of tax returns; (iii) the conduct of tax audits
and the handling of tax controversies; and (iv) various related matters.
For periods during which the Company is included in the Parent's
consolidated federal income tax returns or state consolidated, combined, or
unitary tax returns (which will include the periods on or before the
Distribution Date), the Company will be required to pay an amount of income
tax equal to the amount it would have paid had it filed its tax return as a
separate entity, except in cases where the consolidated or combined group as a
whole realizes a detriment from consolidation or combination. The Company will
be responsible for its own separate tax liabilities that are not determined on
a consolidated or combined basis. The Company will also be responsible in the
future for any increases to the consolidated tax liability of the Company and
the Parent that is attributable to the Company, and will be entitled to
refunds for reductions of tax liabilities attributable to the Company for
prior periods.
The Company will be included in the Parent's consolidated group for federal
income tax purposes so long as the Parent beneficially owns at least 80% of
the total voting power and value of the outstanding Common Stock. Each
corporation that is a member of a consolidated group during any portion of the
group's tax year is jointly and severally liable for the federal income tax
liability of the group for that year. While the Tax Indemnification and
Allocation Agreement allocates tax liabilities between Company and the Parent
during the period on or prior to the Offering Closing Date in which the
Company is included in the Parent's consolidated group, the Company could be
liable in the event federal tax liability allocated to the Parent is incurred,
but not paid, by the Parent or any other member of the Parent's consolidated
group for the Parent's tax years that include such periods. In such event, the
Company would be entitled to seek indemnification from the Parent pursuant to
the Tax Indemnification and Allocation Agreement. See "Risk Factors--Control
of Company; Relationship with the Parent."
As a condition to the Parent effecting the Distribution, the Company will be
required to indemnify the Parent for any tax liability suffered by the Parent
arising out of actions by the Company after the Distribution that would cause
the Distribution to lose its qualification as a tax-free distribution or to be
taxable to the Parent for federal income tax purposes under Section 355 of the
Code. For example, Section 355 generally provides that a company that
distributes shares of a subsidiary in a spin-off that is otherwise tax-free
will incur U.S. federal income tax liability if 50% or more, by vote or value,
of the capital stock of either the company making the distribution or the
subsidiary is acquired by one or more persons acting pursuant to a plan or
series of related transactions that include the spin-off. To ensure that
issuances of equity securities by the Company will not cause the Distribution
to be taxable to the Parent, the Tax Indemnification and Allocation Agreement
contains certain restrictions on issuances of equity securities of the Company
and its repurchase of equity securities until three years following the
Restriction Period. Until the second anniversary of the Distribution Date, the
Company cannot issue Common
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Stock and other equity securities (including the shares sold in the Offering)
that would cause the number of shares of Common Stock distributed by the
Parent in the Distribution to constitute less than 60% of the outstanding
shares of Common Stock unless the Company first obtains either the consent of
the Parent or a favorable IRS letter ruling that the issuance will not affect
the tax-free status of the Distribution. After this period until the end of
the third year from the Distribution Date, the Company cannot issue Common
Stock and other equity securities that, when combined with equity securities
sold in and after the Offering would cause the number of shares of Common
Stock distributed by the Parent in the Distribution to constitute less than
55% of the outstanding shares of Common Stock unless the Company first obtains
the consent of the Parent or a favorable IRS letter or opinion of tax counsel
that the issuance would not affect the tax-free status of the Distribution.
These restrictions on the issuance of equity securities may impede the ability
of the Company to raise necessary capital or to complete acquisitions, if any,
using equity securities. The foregoing prohibitions do not apply to issuances
of debt securities of the Company that are not convertible into Common Stock
or other equity securities. The same requirements for an IRS ruling, consent
of the Parent or an opinion of counsel are applicable to any proposed
repurchases of Common Stock during the Restriction Period. In the event that
the Company is required to indemnify and reimburse the Parent for any tax
liability incurred by the Parent arising out of the Distribution, such
indemnification and reimbursement would have a material adverse effect on the
business, results of operations and financial condition of the Company. See
"Risk Factors--Tax Indemnification Obligation, Limitation on Issuances of
Equity Securities Following the Distribution" and "--Limited Ability to Issue
Common Stock Prior to Distribution."
PARENT STOCK OPTIONS. Parent Stock Options outstanding as of the
Distribution Date will, as of the Distribution Date, become options to
purchase shares of both Parent Common Stock and Common Stock ("Adjusted
Options"). The number of shares of Common Stock that will be subject to such
Adjusted Options will be based upon the ratio of the number of shares of
Common Stock distributed to the Parent's stockholders in the Distribution
divided by the total number of shares of Parent Common Stock outstanding on
the record date for the Distribution. In addition, the exercise price for each
Adjusted Option will be allocated between the option to purchase Parent Common
Stock and the option to purchase Common Stock based on the respective average
post-Distribution closing prices of Parent Common Stock and Common Stock on
the Nasdaq National Market for the 30 days following the ex-dividend date for
the Distribution. The options to purchase Common Stock covered by the Adjusted
Options will be issued under the Company's 1998 Stock Incentive Plan.
As of September 30, 1998, there were outstanding options to purchase 854,893
shares of Parent Common Stock. Based on the number of shares of Parent Common
Stock and options to purchase Parent Common Stock outstanding on September 30,
1998 and the number of shares of Common Stock to be outstanding on the
Offering Closing Date, options to purchase approximately 612,017 shares of
Common Stock would have been granted in connection with Adjusted Options.
JOINT MARKETING AGREEMENT
Prior to the Offering Closing Date, the Company and the Parent intend to
enter into a joint marketing agreement (the "Marketing Agreement"), pursuant
to which the Parent and the Company will agree to continue certain joint
marketing efforts presently in place. The Marketing Agreement will provide
that the Company shall continue to be presented on the home page of the
Parent's "PC Mall" Website on at least one quarter of the page as well as
receive a banner advertisement on the home page of the Parent's PC Mall
Website. The Marketing Agreement will provide that uBid shall provide to the
Parent a button that "clicks through" from the home page of the Company's
Website to the Parent's "PC Mall" Website. As consideration for these
marketing services, the Company will either make a payment of $10,000 per
month to the Parent or the Parent, in its sole discretion, may elect to
receive a banner advertisement on each page of the Company's Website in lieu
of the monthly payment. The Marketing Agreement will have a term of one year
and shall be terminable by either party upon 60 days prior written notice.
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INTERNET/TELECOMMUNICATIONS AGREEMENT
Prior to the Offering Closing Date, the Company and the Parent also intend
to enter into an Internet/telecommunications agreement (the
"Internet/Telecommunications Agreement") pursuant to which the Parent will
continue to provide the Company with certain Internet and telecommunications
services, including hosting the Company's Website. The Company will agree to
reimburse the Parent for all telecommunications charges (other than personnel
charges), as well as pay additional monthly personnel charges on a cost-plus
10% basis and capital equipment charges based on standard lease rates. The
Internet/Telecommunications Agreement will have an initial term of one year
and be cancelable, at the option of either party, upon 90 days prior written
notice, provided that, upon such cancellation, the Company shall be required
to purchase all capital equipment from the Parent at its depreciated book
value.
SUBLEASE AGREEMENT
In July 1998, the Company and the Parent entered into a sublease currently
covering 100,000 square feet of the Parent's 325,000 square foot distribution
center in Memphis, Tennessee. The sublease provides for the Company's
continued use of the Parent's sophisticated inventory control and shipping
systems during the term of the sublease. The sublease is at a monthly rate
equal to the Parent's obligations to the landlord, plus taxes and utilities,
and will expire in 2002.
OTHER RELATIONSHIPS WITH THE PARENT
On the Offering Closing Date, the Parent will own 7,329,883 shares of Common
Stock, which will represent approximately 82.3% of the voting power of all
outstanding shares of Common Stock (80.1% if the Underwriters exercise their
over-allotment option in full). In addition, Frank F. Khulusi, a director of
the Company, also is the Chairman, President and Chief Executive Officer of
the Parent.
PARENT CREDIT AGREEMENT
The Parent is party to a credit agreement pursuant to which it has a credit
facility of up to $60 million. Under the credit agreement, each of the
Parent's subsidiaries, including the Company, is required to guarantee the
Parent's obligations and to grant the lender a security interest in its assets
to secure the obligations under the guaranty. The lender has signed a letter
consenting to both the Offering and the Distribution and agreeing that the
Company's guaranty obligations will cease, and the security interest in the
collateral will be released, concurrently with the consummation of the
Offering. In connection with obtaining the lender's consent thereto, the
Company and the Parent have entered into an agreement with the lender,
effective from the consummation of the Offering through the Distribution, that
provides that neither the Company nor the Parent will make certain transfers
to each other of their respective assets which might impair the effectiveness
or enforceability of the lender's security interest in assets of the Parent.
PAYABLE TO PARENT
Since Inception, the Parent has provided the funds to finance the Company's
operations in the form of advances (approximately $3.7 million at September
30, 1998) that bear interest at the prime rate. The Company expects that the
amount of such advances through the Offering Closing Date will approximate $5
million. These advances will become payable 18 months following the Offering
Closing Date with interest payable monthly.
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PRINCIPAL STOCKHOLDER
Prior to the Offering Closing Date, the Company has been a wholly-owned,
indirect subsidiary of the Parent. On the Offering Closing Date, the Parent
will own 7,329,883 of the outstanding shares of Common Stock, which will
represent approximately 82.3% of the voting power of all outstanding shares of
Common Stock (80.1% if the Underwriters exercise their over-allotment option
in full). Except for the Parent, the Company is not aware of any person or
group that will beneficially own more than 5% of the outstanding shares of
Common Stock upon the Offering Closing Date.
The following table sets forth information with respect to the beneficial
ownership of the Company's outstanding Common Stock as of November 1, 1998 and
as adjusted to reflect the sale of the Common Stock offered hereby by (i) each
person who is known by the Company to be the beneficial owner of more than 5%
of the Company's Common Stock, (ii) each of the Company's directors, (iii)
each of the Company's Named Officers, and (iv) all directors and Named
Officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY
NUMBER OF NUMBER OF OWNED
SHARES SHARES TO BE -----------------
BENEFICIALLY SOLD IN THE BEFORE AFTER
BENEFICIAL OWNER (1) OWNED OFFERING OFFERING OFFERING
- -------------------- ------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Creative Computers, Inc. (2)....... 7,329,883 -- 100.0% 82.3%
Gregory K. Jones (3)............... 73,299 -- * *
Thomas E. Werner................... -- -- * *
George Lu.......................... -- -- * *
Timothy E. Takesue................. -- -- * *
David L. Hirschman (4)............. 21,990 -- * *
Joel D. Ludvigsen ................. -- -- * *
David M. Matthews (5).............. 14,660 -- * *
Brian A. Williams.................. -- -- * *
Frank F. Khulusi................... -- -- * *
Howard A. Tullman.................. -- -- * *
Norman H. Wesley................... -- -- * *
All directors and Named Officers as
a group (11 persons) (6).......... 109,949 -- 1.2% 1.2%
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
(1) Except as otherwise specified, the address of all persons on the list set
forth above is: 2525 Busse Road, Elk Grove Village, Illinois 60007.
(2) The address of Creative Computers, Inc. is 2555 West 190th Street,
Torrance, California 90504.
(3) Includes options to purchase approximately 73,299 shares of Common Stock
which are presently vested or will vest on the Offering Closing Date.
(4) Includes options to purchase approximately 21,990 shares of Common Stock
which are presently vested or will vest on the Offering Closing Date.
(5) Includes options to purchase approximately 14,660 shares of Common Stock
which are presently vested or will vest on the Offering Closing Date.
(6) Includes an aggregate of 109,949 shares of Common Stock issuable upon the
exercise of options that are presently vested or will vest on the Offering
Closing Date.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The Certificate of Incorporation authorizes 25,000,000 shares of capital
stock consisting of (a) 5,000,000 shares of preferred stock, par value $.001
per share (the "Preferred Stock"), and (b) 20,000,000 shares of Common Stock.
Of the shares of Common Stock, 1,580,000 shares are being offered hereby.
Immediately following the Offering Closing Date, 8,909,883 shares of Common
Stock (9,146,883 shares if the Underwriters exercise their over-allotment
option in full) will be outstanding, of which 7,329,883 shares of Common Stock
will be held by the Parent, and no shares of Preferred Stock will be
outstanding. All of the shares of Common Stock that will be outstanding
immediately following the Offering Closing Date, including the shares of
Common Stock sold in the Offering, will be validly issued, fully paid and
nonassessable. The following summary description of the capital stock of the
Company is qualified by reference to the Certificate of Incorporation and
Bylaws of the Company, copies of which will be filed as exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
VOTING. The Common Stock is entitled to one vote per share on all matters
submitted to a vote of the stockholders, including the election of directors.
Except as otherwise required by law or provided in any resolution adopted by
the Board with respect to any series of Preferred Stock, the holders of Common
Stock will possess all voting power. Generally, all matters to be voted on by
stockholders must be approved by a majority (or, in the case of election of
directors, by a plurality) of the votes entitled to be cast by all shares of
Common Stock that are present in person or represented by proxy, subject to
any voting rights granted to holders of any Preferred Stock. Except as
otherwise provided by law, and subject to any voting rights granted holders of
any Preferred Stock, amendments to the Certificate of Incorporation generally
must be approved by a majority of the votes entitled to be cast by all
outstanding shares of Common Stock. The Certificate of Incorporation does not
provide for cumulative voting in the election of directors.
DIVIDENDS. Subject to any preferential rights of any outstanding series of
Preferred Stock created by the Board from time to time, the holders of shares
of Common Stock will be entitled to such cash dividends as may be declared
from time to time by the Board from funds available therefor. See "Dividend
Policy."
LIQUIDATION. Subject to any preferential rights of any outstanding series of
Preferred Stock created from time to time by the Board, upon liquidation,
dissolution or winding up of the Company, the holders of shares of Common
Stock will be entitled to receive pro rata all assets of the Company available
for distribution to such holders.
OTHER RIGHTS. In the event of any merger or consolidation of the Company
with or into another company in connection with which shares of Common Stock
are converted into or exchangeable for shares of stock, other securities or
property (including cash), all holders of Common Stock will be entitled to
receive the same kind and amount of shares of stock and other securities and
property (including cash).
PREFERRED STOCK
The Certificate of Incorporation authorizes the Board to establish one or
more series of Preferred Stock and to determine, with respect to any series of
Preferred Stock, to fix the designations, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, including, without limitation, the
authority to fix or alter the dividend rights, dividend rates, conversion
rights, exchange rights, voting rights, rights and terms of redemption
(including sinking and purchase fund provisions), the redemption price or
prices, the dissolution preferences and the rights in respect to any
distribution of assets of any wholly unissued series of Preferred Stock and
the number of shares constituting any such series, and the designation
thereof, or any of them and to increase or decrease the number of shares of
any series so created.
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The Company believes that the ability of the Board to issue one or more
series of Preferred Stock will provide the Company with flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs that might arise. The authorized shares of Preferred Stock, as
well as shares of Common Stock, will be available for issuance without further
action by the Company's stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation
system on which the Company's securities may be listed or traded.
Although the Board has no intention at the present time of doing so, it
could issue a series of Preferred Stock that could, depending on the terms of
such series, impede the completion of a merger, tender offer or other takeover
attempt. The Board will make any determination to issue such shares based on
its judgment as to the best interests of the Company and its stockholders. The
Board, in so acting, could issue Preferred Stock having terms that could
discourage an acquisition attempt through which an acquirer may be able to
change the composition of the Board, including a tender offer or other
transaction that some, or a majority, of the Company's stockholders might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then current market price of such stock. See
"Risk Factors--Anti-Takeover Effects of Delaware Law and Certain Charter
Provisions."
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the Certificate of Incorporation and Bylaws,
summarized in the following paragraphs, may be considered to have an anti-
takeover effect and may delay, deter or prevent a tender offer, proxy contest
or other takeover attempt that a stockholder might consider to be in such
stockholder's best interest, including such an attempt as might result in
payment of a premium over the market price for shares held by stockholders.
The Certificate of Incorporation and Bylaws provide for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of
Directors will be elected each year. Classification of the Board of Directors
expands the time required to change the composition of a majority of directors
and may tend to discourage a proxy contest or other takeover bid for the
Company. Moreover, under the DGCL, in the case of a corporation having a
classified board of directors, the stockholders may remove a director only for
cause.
The Certificate of Incorporation provides that special meetings of
stockholders may be called by the President and Chief Executive Officer or at
the request of a majority of the Board of Directors of the Company.
The Bylaws provide that stockholders seeking to bring business before a
meeting of stockholders, or to nominate candidates for election as directors
at an annual meeting of stockholders, must provide timely notice thereof in
writing. To be timely, a stockholder's notice to bring business before a
meeting must be delivered to, or mailed and received at, the principal
executive office of the Company not less than 60 days nor more than 90 days
prior to the scheduled meeting. The Bylaws will also specify certain
requirements pertaining to the form and substance of a stockholder's notice.
These provisions may preclude some stockholders from making nominations for
directors at an annual meeting or from bringing other matters before the
stockholders at a meeting.
The Certificate of Incorporation does not allow the stockholders of the
Company to take action by written consent.
Section 203 of the DGCL ("Section 203") provides that, subject to certain
exceptions specified therein, an "interested stockholder" of a Delaware
corporation shall not engage in any business combination, including mergers or
consolidations or acquisitions of additional shares of the corporation, with
the corporation for a three-year period following the date that such
stockholder becomes an interested stockholder unless: (i) prior to such
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date, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which
resulted in the stockholder becoming an "interested stockholder," the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding
certain shares); or (iii) on or subsequent to such date, the business
combination is approved by the board of directors of the corporation and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder. Except as otherwise specified in Section 203, an
interested stockholder is defined to include (x) any person that owns (or,
within the prior three years, did own) 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the corporation
and was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within three years immediately prior to the date of
determination and (y) the affiliates and associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. The Company has not
elected to be exempt from the restrictions imposed under Section 203. However,
the Parent and its affiliates are excluded from the definition of "interested
stockholder" pursuant to the terms of Section 203. The provisions of Section
203 may encourage persons interested in acquiring the Company to negotiate in
advance with the Board, since the stockholder approval requirement would be
avoided if a majority of the directors then in office approves either the
business combination or the transaction which results in any such person
becoming an interested stockholder. Such provisions also may have the effect
of preventing changes in the management of the Company. It is possible that
such provisions could make it more difficult to accomplish transactions which
the Company's stockholders may otherwise deem to be in their best interests.
LIABILITY OF DIRECTORS; INDEMNIFICATION
The Certificate of Incorporation contains a provision that is designed to
limit directors' liability to the extent permitted by the DGCL and any
amendments thereto. Specifically, directors will not be held liable to the
Company or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability as a result of: (i) any breach of the
duty of loyalty to the Company or its stockholders; (ii) actions or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) payment of an improper dividend or improper repurchase
of the Company's stock under Section 174 of the DGCL; or (iv) actions or
omissions pursuant to which the director received an improper personal
benefit. The principal effect of the limitation of liability provision is that
a stockholder is unable to prosecute an action for monetary damages against a
director of the Company unless the stockholder can demonstrate one of the
specified bases for liability. The provision, however, does not eliminate or
limit director liability arising in connection with causes of action brought
under the federal securities laws. The Certificate of Incorporation does not
eliminate a director's duty of care. The inclusion of this provision in the
Certificate of Incorporation may, however, discourage or deter stockholders or
management from bringing a lawsuit against directors for a breach of their
fiduciary duties, even though such an action, if successful, might otherwise
have benefited the Company and its stockholders. This provision should not
affect the availability of equitable remedies such as injunction or rescission
based upon a director's breach of the duty of care.
The Certificate of Incorporation and Bylaws also provide that the Company
will indemnify its directors and officers, and may indemnify any of its
employees and agents, to the fullest extent permitted by Delaware law. The
Company is generally required to indemnify its directors and officers for all
judgments, fines, penalties, settlements, legal fees and other expenses
incurred in connection with pending, threatened or completed legal proceedings
because of the director's or officer's position with the Company or another
entity that the director or officer serves at the Company's request, subject
to certain conditions and to advance funds to its directors and officers to
enable them to defend against such proceedings.
At present, there is no pending or threatened litigation or proceeding
involving any director or officer, employee or agent of the Company where such
indemnification will be required or permitted.
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REGISTRATION RIGHTS
After the Offering Closing Date, the Parent and Messrs. Frank and Sam
Khulusi will have the right, in certain circumstances to require registration
of shares of Common Stock under the 1933 Act. The registration rights granted
to the Parent are provided for by the Separation and Distribution Agreement
and will terminate upon the consummation of the Distribution. The registration
rights granted to Messrs. Frank and Sam Khulusi are covered by a separate
agreement and will only become effective if the Distribution occurs. Under the
terms of each of the registration rights agreements between the Company and
these holders of such registrable securities, if the Company proposes to
register any of its securities under the 1933 Act, the registration rights
agreements provide that the holder, or holders, as applicable, are entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein (a "Piggyback Registration"). Subject to certain limitations in
the agreements, the Parent, on the one hand, and Messrs. Frank and Sam
Khulusi, on the other hand, may require, on two occasions, that the Company
use its best efforts to register such shares for public resale, subject to
certain limitations ("Demand Registration"). These registration rights are
subject to certain conditions and limitations, among them the right of the
underwriters in a Piggyback Registration to limit the number of shares
included in such registration in certain circumstances. The Company will bear
the cost of all Piggyback Registrations. In addition, the Company will bear
the costs of up to $100,000 of the first, and up to $50,000 of the second,
Demand Registrations of Messrs. Frank and Sam Khulusi. The Parent has agreed
not to request registration of its shares of Common Stock for 180 days
following the Offering Closing Date. Messrs. Frank and Sam Khulusi have agreed
not to request the registration of their shares pursuant to any Demand
Registration for 180 days following the Distribution Date. In addition, for an
additional 90 days after the applicable 180-day period, the Company will be
entitled to include its shares in any requested Demand Registration and to
reduce the number of shares to be sold by the Parent or Messrs. Frank and Sam
Khulusi thereunder to a minimum of 20%, collectively, of the total offering
plus the amount of any underwriters' over-allotment option. If, as a result of
this cutback procedure, the number of shares sold by the Company in the
offering constitutes more than one half of the total shares sold, the
registration of such shares would be treated as a Piggyback Registration, and
the Company would bear the cost of such registration as noted above.
TRANSFER AGENT AND REGISTRAR
LaSalle National Bank will be the transfer agent and registrar for the
Common Stock.
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U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The Parent has received the PwC Opinion to the effect that for Federal
income tax purposes:
1. The Distribution will qualify as a tax-free spin-off under Section 355 of
the Code.
2. The contribution by the Parent of certain rights in software to the
Company, followed by the distribution by the Parent of all of its Common
Stock, will qualify as a reorganization within the meaning of
Section 368(a)(1)(D) of the Code. The Company and the Parent will each be a
"party to the reorganization" within the meaning of Section 368(b).
3. No gain or loss will be recognized by the Parent upon the Distribution.
4. No gain or loss will be recognized by holders of Parent Common Stock
solely as a result of their receipt of Common Stock (including any fractional
shares of Common Stock to which a holder may be entitled) in the Distribution.
5. The aggregate tax basis of Parent Common Stock and Common Stock
(including any fractional shares of Common Stock to which a holder may be
entitled) held immediately after the Distribution by any holder will equal, in
each instance, such holder's tax basis in its Parent Common Stock immediately
before the Distribution, allocated in proportion to the relative fair market
values of Parent Common Stock and Common Stock on the Distribution Date.
6. The holding period of the Common Stock received in the Distribution
(including any fractional shares of Common Stock to which a holder may be
entitled) will include the holding period of Parent Common Stock with respect
to which the Common Stock was distributed, provided that such Parent Common
Stock was held as a capital asset on the Distribution Date.
7. Where cash is received by a holder of Parent Common Stock in lieu of
fractional share interests in the Common Stock such fractional share interests
will be treated as having been issued and then redeemed by such holder. The
difference between the amount of cash received and basis allocable to such
fractional share interest will be a capital gain or loss, as the case may be,
provided that Parent Common Stock is held as a capital asset on the
Distribution Date.
8. Proper allocation of earnings and profits between the Company and the
Parent will be required by current Treasury regulations.
The PwC Opinion is subject to certain factual representations and
assumptions. The Company is not aware of any present facts or circumstances
that would cause such representations and assumptions to be untrue. The Parent
and the Company will also agree to certain restrictions on their future
actions to provide further assurances that the Distribution will qualify as
tax free. See "Risk Factors--Tax Indemnification Obligation; Limitation on
Issuances of Equity Securities Following the Distribution," "--Limited Ability
to Issue Common Stock Prior to Distribution" and "Certain Transactions--Tax
Indemnification and Allocation Agreement." In the event that the Parent
decides to seek a letter ruling from the IRS with respect to the Federal
income tax consequences of the Distribution, there can be no assurance that
the IRS will not take a position contrary to that expressed in the PwC
Opinion. See "Risk Factors--Risk of Noncompletion of a Tax-Free Distribution."
If the Distribution were not to qualify under Section 355 of the Code, then
(i) the Parent would recognize capital gain equal to the excess of (x) the
fair market value of the Common Stock on the Distribution Date over (y) its
adjusted tax basis in the Common Stock, and (ii) each holder of Parent Common
Stock who receives shares of Common Stock in the Distribution would be treated
as if such stockholder received a taxable distribution in an amount equal to
the fair market value of such shares of the Common Stock on the Distribution
Date, taxed first as a dividend to the extent of such stockholder's pro rata
share of the Parent's current and accumulated earnings and profits, and then
as a nontaxable return of capital to the extent of such stockholder's basis in
Parent Common Stock (with any remaining amount being taxed as capital gain).
Pursuant to the Tax Indemnification and Allocation Agreement, the Parent and
the Company will agree that if any one of certain events occurs, and such
event causes the Distribution not to be a tax-free transaction to the Parent
under Section 355, then the Company
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will indemnify the Parent for the income taxes the Parent may occur by reason
of the Distribution not so qualifying under the Code. The Parent will
indemnify the Company for such taxes for which the Company has no liability to
the Parent under the Tax Indemnification and Allocation Agreement. Regardless
of such agreement, the Parent and the Company will each be severally liable to
the Internal Revenue Service for the full amount of any such Federal corporate
level tax that is not paid by the other. For a description of the Tax
Indemnification and Allocation Agreement, see "Certain Transactions--Tax
Indemnification and Allocation Agreement."
Stockholders of the Parent should consult their own advisers as to the
specific tax consequences of the Distribution as to the specific tax
consequences of the Distribution of their particular circumstances, including
the effects of foreign, state and local tax laws and the effect of possible
changes in tax laws.
67
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Of the 8,909,883 shares of Common Stock to be outstanding on the Offering
Closing Date (9,146,883 shares if the Underwriters exercise their over-
allotment option in full) the 1,580,000 shares of Common Stock sold in the
Offering (1,817,000 shares if the Underwriters exercise their over-allotment
option in full) will be freely tradable without restriction under the 1933
Act, except for any such shares which be may acquired by an affiliate of the
Company (an "Affiliate"), as that term is defined in Rule 144 promulgated
under the 1933 Act ("Rule 144"). On the Offering Closing Date, the Parent will
own 7,329,883 shares of Common Stock which will constitute 82.3% of the
outstanding shares of Common Stock (80.1% if the Underwriters exercise their
over-allotment option in full). Parent has announced that, subject to certain
conditions, the Parent intends to distribute to its stockholders in 1999 all
of the Common Stock held by the Parent by means of the Distribution. Shares of
Common Stock to be distributed to the Parent's stockholders in the
Distribution generally will be freely transferable, except for shares of
Common Stock received by persons who may be deemed to be Affiliates. Persons
who may be deemed to be Affiliates generally include individuals or entities
that control, are controlled by, or are under common control with, the Company
and may include directors and certain officers of the Company as well as
significant stockholders of the Company, if any. Persons who are Affiliates
will be permitted to sell the shares of Common Stock that are issued in the
Offering or that they receive in the Distribution only pursuant to an
effective registration statement under the 1933 Act or an exemption from the
registration requirements of the 1933 Act, including exemptions provided by
Rule 144.
The shares of Common Stock held by the Parent are deemed "restricted
securities" as defined in Rule 144, and may not be sold other than through
registration under the 1933 Act or pursuant to an exemption from the
regulations thereunder, including exceptions provided by Rule 144. Subject to
applicable law and to the contractual restriction with the Underwriters
described below, the Parent may sell any and all of the shares of Common Stock
it owns after completion of the Offering. The Separation and Distribution
Agreement will provide that the Parent will have the right in certain
circumstances to require the Company to use its best efforts to register for
resale shares of Common Stock held by the Parent. See "Certain Transactions--
Separation and Distribution Agreement." The Company, each of its directors and
executive officers and the Parent have each agreed, for a period of 180 days
after the date of this Prospectus, not to offer or sell any shares of Common
Stock, subject to certain exceptions (including the Distribution), without the
prior written consent of Merrill Lynch on behalf of the Underwriters. See
"Underwriting." In addition, after the Offering Closing Date and prior to the
Distribution Date, the Company has agreed not to issue any shares of its
capital stock or any rights, warrants, or other securities to purchase or
acquire any shares of its capital stock, without the prior consent of the
Parent. See "Certain Transactions--Separation and Distribution Agreement."
Subject to the foregoing restrictions, the Company may issue additional shares
of Common Stock to raise equity or make acquisitions. The Company may also
issue additional shares of Common Stock to the Parent in exchange for
additional investments of cash or other property by the Parent in the Company.
In addition, upon completion of the Distribution, certain stock options
exercisable for shares of Parent Common Stock will be converted into stock
options exercisable for shares of Common Stock. See "Certain Transactions--Tax
Indemnification and Allocation Agreement." In addition, subject to the prior
consent of the Parent, the Company may grant options to purchase shares of
Common Stock to employees, non-employee directors and independent contractors
of the Company pursuant to the 1998 Stock Incentive Plan. See "Management--
Stock Options." The Company currently expects to file promptly following the
Offering Closing Date a registration statement under the 1933 Act to register
shares reserved for issuance under the 1998 Stock Incentive Plan. Shares
issued pursuant to the 1998 Stock Incentive Plan after the effective date of
such registration statement (other than shares issued to Affiliates) generally
will be freely tradable without restriction or further registration under the
1933 Act.
68
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated and William Blair &
Company, L.L.C. are acting as Representatives (the "Representatives") of each
of the Underwriters named below (the "Underwriters"). Subject to the terms and
conditions set forth in a purchase agreement (the "Purchase Agreement") among
the Company and the Underwriters, the Company has agreed to sell to the
Underwriters, and each of the Underwriters severally and not jointly has
agreed to purchase from the Company, the number of shares of Common Stock set
forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- -----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
William Blair & Company, L.L.C. .................................
-----------
Total.......................................................
===========
</TABLE>
In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the shares of
Common Stock being sold pursuant to such agreement if any of the shares of
Common Stock being sold pursuant to such agreement are purchased. Under
certain circumstances, under the Purchase Agreement, the commitments of non-
defaulting Underwriters may be increased.
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the initial
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share of Common Stock. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $ per share of Common Stock on sales
to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
At the Company's request, the Underwriters have reserved for sale at the
initial public offering price up to 110,000 shares of Common Stock offered
hereby for certain individuals who have expressed an interest in purchasing
such shares of Common Stock in the Offering. 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.
The Company has granted an option to the Underwriters, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
237,000 additional shares of Common Stock at the initial public offering price
set forth on the cover page of this Prospectus, less the underwriting
discount. The Underwriters may exercise this option solely to cover over-
allotments, if any, made on the sale of the Common Stock offered hereby. To
the extent that the Underwriters exercise this option, each Underwriter will
be obligated, subject to certain conditions, to purchase a number of
additional shares of Common Stock proportionate to such Underwriter's initial
amount reflected in the foregoing table.
Each of the Company, its directors and executive officers and the Parent has
agreed, for a period of 180 days after the date of this Prospectus, subject to
certain exceptions, not to directly or indirectly (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of or
otherwise dispose of or transfer any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock, whether now
owned or thereafter acquired by the person executing the agreement or with
respect to which the person executing the agreement thereafter acquires the
power of disposition, or file a registration statement under the 1933 Act with
respect to the foregoing or (ii) enter into any swap or other agreement that
transfers, in whole or in part, the economic consequence of ownership of the
Common Stock whether any such swap or transaction is to be settled by delivery
of Common Stock or other securities, in cash or otherwise, without the prior
written consent of Merrill
69
<PAGE>
Lynch on behalf of the Underwriters. See "Shares Eligible for Future Sale."
Additionally, Messrs. Frank and Sam Khulusi have each agreed, until 180 days
following the Distribution Date, not to offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, or otherwise dispose of or transfer any shares of Common Stock owned by
them, or exercise any demand for registration of any shares of Common Stock.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price of the Common Stock will be
determined through negotiations between the Company and the Representatives.
The factors considered in determining the initial public offering price, in
addition to prevailing market conditions, are price-revenue and discounted
price-earnings ratios of publicly traded companies that the Representatives
believe to be comparable to the Company, certain financial information of the
Company, the history of, and the prospects for, the Company and the industry
in which it competes, and an assessment of the Company's management, its past
and present operations, the prospects for, and timing of, future revenues of
the Company, the present state of the Company's development, and the above
factors in relation to market values and various valuation measures of other
companies engaged in activities similar to the Company. 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 public market subsequent to the
Offering at or above the initial public offering price.
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "UBID," subject to official notice of issuance. In order to
meet the requirements for listing of the Common Stock on that market, the
Underwriters have undertaken to sell lots of 100 or more shares to a minimum
of 400 beneficial owners.
The Underwriters do not expect sales of the Common Stock to any accounts
over which they exercise discretionary authority to exceed 5% of the number of
shares being offered hereby.
The Company and the Parent have agreed to indemnify, jointly and severally,
the Underwriters against certain liabilities, including liabilities under the
1933 Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.
In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transaction may include over-allotment
and stabilizing transactions and purchases to cover short positions created by
the Underwriters in connection with the Offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or
retarding a decline in the market price of the Common Stock; and syndicate
short positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from the Company in
the Offering. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to broker-dealers in respect of the securities sold in the
Offering may be reclaimed by the Underwriters if such shares of Common Stock
are repurchased by the Underwriters in stabilizing or covering transactions.
These activities may stabilize, maintain or otherwise affect the market price
of the Common Stock, which may be higher than the price that may otherwise
prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Morrison & Foerster llp,
Irvine, California. Certain legal matters relating to the Offering will be
passed upon for the Underwriters by Latham & Watkins, San Francisco,
California.
EXPERTS
The financial statements of the Company at December 31, 1997 and September
30, 1998 and for the period from Inception to December 31, 1997 and for the
nine months ended September 30, 1998, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
70
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the 1933 Act with
respect to the Common Stock offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain
portions of which are omitted as permitted by the rules and regulations of the
Commission. For further information pertaining to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto and the financial statements, notes and
schedules filed as a part thereof. Statements contained in this Prospectus
regarding the contents of any contract or other document referred to herein or
therein are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
On the Offering Closing Date, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information, as well as the Registration Statement and the exhibits and
schedules thereto, may be inspected, without charge, at the public reference
facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Seven World Trade Center, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. Copies of such material may also be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. Such materials can also be inspected on the Commission's
site on the Internet at http://www.sec.gov.
71
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................... F-2
Balance Sheets as of December 31, 1997 and September 30, 1998............ F-3
Statements of Operations for the Period April 1, 1997 (Inception) to
December 31, 1997 and the Nine Months Ended September 30, 1998.......... F-4
Statements of Cash Flows for the Period April 1, 1997 (Inception) to
December 31, 1997 and the Nine Months Ended September 30, 1998.......... F-5
Statements of Changes in Stockholder's Deficit for the Period April 1,
1997 (Inception) to December 31, 1997 and the Nine Months Ended
September 30, 1998...................................................... F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
uBid, Inc.
We have audited the accompanying balance sheets of uBid, Inc. (a wholly-
owned subsidiary of Creative Computers, Inc.) as of December 31, 1997 and
September 30, 1998, and the related statements of operations, cash flows and
changes in stockholder's deficit for the period from April 1, 1997 (Inception)
to December 31, 1997 and the nine-month period ended September 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of uBid, Inc. as of December
31, 1997 and September 30, 1998, and the results of its operations and its
cash flows for the period from April 1, 1997 (Inception) to December 31, 1997
and the nine-month period ended September 30, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
November 16, 1998, except as to Note 7, as to which the date is November 30,
1998.
F-2
<PAGE>
uBID, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, net of allowances of $20 at
September 30, 1998................................. $ 9 $ 499
Merchandise inventories............................. 2 4,498
Prepaid expenses.................................... 20 10
----- -------
Total current assets............................ 31 5,007
Deferred offering costs............................. -- 739
Fixed assets, net................................... 327 302
----- -------
Total assets.................................... $ 358 $ 6,048
===== =======
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable.................................... $ -- $ 4,760
Accrued professional fees........................... -- 383
Accrued advertising................................. -- 263
Accrued expenses and other current liabilities...... -- 225
----- -------
Total current liabilities....................... -- 5,631
Advances from the Parent............................ 670 3,709
Stockholder's deficit:
Preferred Stock; $.001 par value; 5,000,000 shares
authorized; no shares issued or outstanding........ -- --
Common Stock; $.001 par value; 20,000,000 shares
authorized; 7,329,883 shares issued and
outstanding........................................ 1 1
Additional paid-in-capital.......................... -- --
Accumulated deficit................................. (313) (3,293)
----- -------
Total stockholder's deficit..................... (312) (3,292)
----- -------
Total liabilities and stockholder's deficit..... $ 358 $ 6,048
===== =======
</TABLE>
See notes to the financial statements.
F-3
<PAGE>
uBID, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1997 NINE-MONTH
(INCEPTION) TO PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------- -------------
<S> <C> <C>
Net revenues...................................... $ 9 $ 24,125
Cost of revenues.................................. 8 22,192
--------- ---------
Gross profit...................................... 1 1,933
Operating expenses:
Sales and marketing............................. 10 1,353
Technology and development...................... 66 694
General and administrative...................... 212 2,707
--------- ---------
Total operating expenses...................... 288 4,754
--------- ---------
Loss from operations.............................. (287) (2,821)
Interest expense to Parent........................ 26 159
--------- ---------
Loss before income taxes.......................... (313) (2,980)
Provision for income taxes........................ -- --
--------- ---------
Net loss.......................................... $ (313) $ (2,980)
========= =========
Basic and diluted net loss per share.............. $ (0.04) $ (0.41)
========= =========
Shares used to compute basic and diluted net loss
per share........................................ 7,329,883 7,329,883
</TABLE>
See notes to the financial statements.
F-4
<PAGE>
uBID, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1997 NINE-MONTH
(INCEPTION) TO PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(313) $(2,980)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................... 4 101
Changes in operating assets and liabilities:
Accounts receivable, net...................... (9) (490)
Prepaid expenses.............................. (20) 10
Merchandise inventories, net.................. (2) (4,496)
Accounts payable.............................. -- 4,760
Accrued professional fees..................... -- 383
Accrued advertising........................... -- 263
Accrued expenses and other current
liabilities.................................. -- 225
----- -------
Net cash used by operating activities............. (340) (2,224)
Cash flows from investing activities:
Purchases of property and equipment............. (331) (75)
----- -------
Net cash used by investing activities............. (331) (75)
Cash flows from financing activities:
Issuance of Common Stock to the Parent.......... 1 --
Advances from the Parent........................ 670 3,038
Deferred offering costs......................... -- (739)
----- -------
Net cash provided by financing activities......... 671 2,299
----- -------
Net change in cash and cash equivalents........... -- --
Cash and cash equivalents at beginning of period.. -- --
----- -------
Cash and cash equivalents at end of period........ $ -- $ --
===== =======
</TABLE>
See notes to the financial statements.
F-5
<PAGE>
uBID, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock to the
Parent......................... 7,330 $ 1 $ -- $ -- $ 1
Net loss for the period......... -- -- -- (313) (313)
----- ------ --------- ----------- -------
Balance at December 31, 1997.... 7,330 $ 1 -- (313) (312)
Net loss for the period......... -- -- -- (2,980) (2,980)
----- ------ --------- ----------- -------
Balance at September 30, 1998... 7,330 $ 1 $ -- $ (3,293) $(3,292)
===== ====== ========= =========== =======
</TABLE>
See notes to the financial statements.
F-6
<PAGE>
uBID, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF COMPANY
uBid is engaged in the retail sale of excess merchandise, including close-
out and refurbished products, utilizing an interactive online auction. The
Company currently specializes in selling primarily brand name computer,
consumer electronics and home and leisure products over the World Wide Web to
consumers and small and medium-sized businesses.
The Company, a wholly-owned, indirect subsidiary of Creative Computers, Inc.
("Parent"), a publicly-traded corporation, was incorporated on September 19,
1997. Beginning on April 1, 1997 ("Inception"), prior to the formation of the
Company, the Parent began funding certain startup and development costs
related to the Company's business. For the period from Inception to September
19, 1997, incorporation of the Company, such costs aggregated approximately
$127 of which approximately $49 were capitalized. The net loss for the period
Inception to September 19, 1997 was approximately $78. On September 19, 1997,
assets and liabilities related to the Company were recorded by the Company at
the Parent's basis. The financial statements have been prepared as if the
Company operated as a stand-alone entity since Inception.
REVENUE RECOGNITION
The Company sells merchandise from vendors under one of two types of sales
transactions. The Company either purchases merchandise and sells it to
customers or sells merchandise to customers under consignment-type revenue
sharing agreements with vendors. For the nine months ended September 30, 1998,
the Company's sales of purchased inventory comprised approximately 97% of
revenues, with consignment-type revenue sharing representing approximately 3%
of revenues.
SALES--PURCHASED INVENTORY
For sales of merchandise owned and warehoused by the Company, the Company is
responsible for conducting the auction, billing the customer, shipping the
merchandise to the customer, processing merchandise returns and collecting
accounts receivable. The Company recognizes the gross sales amount as revenue
upon verification of the credit card transaction authorization and shipment of
the merchandise. In instances where the credit card authorization has been
received but the merchandise has not yet been shipped, the Company defers
revenue recognition until the merchandise is shipped. The Company had no
deferred revenue at December 31, 1997 or September 30, 1998. Revenue from
sales where credit has been extended is recognized when merchandise is
shipped.
SALES--REVENUE SHARING AGREEMENTS
For sales of merchandise under revenue sharing agreements, the Company
either takes physical possession of the merchandise or the vendor retains
physical possession of the merchandise. In either case, the Company is not
obligated to take title to the merchandise nor does it take title unless it
successfully sells the merchandise at auction. Upon completion of an auction,
the Company purchases the inventory, takes title to the merchandise, charges
the customer's credit card and either ships the merchandise directly or
arranges for a third party to complete delivery to the customer. The Company
records the gross sales amount as revenue upon verification of the credit card
authorization and shipment of the merchandise. In instances where credit card
authorization has been received but the merchandise has not been shipped, the
Company defers revenue recognition until the merchandise is shipped. The
Company had no deferred revenue at December 31, 1997 or September 30, 1998.
Revenue from sales where credit has been extended is recognized when
merchandise is shipped.
F-7
<PAGE>
uBID, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MERCHANDISE RETURN POLICY
The Company's return policy is that merchandise sold by the Company is sold
on an "as is" basis and is not returnable. However, the Company, although not
obligated to do so, may accept merchandise returns if a product is defective
or does not conform to the specifications of the item sold at auction, and
attempts to work with its customers to resolve complaints about merchandise.
The Company provides for allowances for estimated future returns at the time
of shipment based on historical experience.
MERCHANDISE INVENTORY
The Company accounts for merchandise inventory under the first-in first-out
method. Inventory is carried at lower of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on the estimated useful lives of the assets
which range from three to five years.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain intangible assets for
impairment when events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. In the event the sum of the
expected undiscounted future cash flows resulting from the use of the asset is
less than the carrying amount of the asset, an impairment loss equal to the
excess of the asset's carrying value over its fair value is recorded. The
Company has recognized no such losses.
SOFTWARE DEVELOPMENT COSTS
In accordance with SOP 98-1, internal and external costs incurred to develop
internal-use computer software are expensed during the preliminary project
stage and capitalized during the application development stage and amortized
over three years. During the period ended December 31, 1997 and the nine-month
period ended September 30, 1998, $39 and $0 was expensed, respectively. As of
December 31, 1997 and September 30, 1998, capitalized software net of
accumulated amortization was $264 and $194, respectively.
ADVERTISING COSTS
Advertising costs are charged to expense as incurred. Advertising expense
was $0 and $1,248 for the periods ended December 31, 1997 and September 30,
1998, respectively.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under this
method, deferred income taxes are recognized by applying enacted statutory tax
rates applicable to future years to differences between the tax bases and
financial reporting amounts of existing assets and liabilities. Valuation
allowances are established, when necessary, to reduce deferred tax assets to
the amount expected to be realized.
The operations of the Company are included in the consolidated tax return of
the Parent. The tax provision presented in these financial statements was
determined as if the Company filed a separate return.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for employee stock based compensation in accordance
with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees" and related interpretations in accounting
F-8
<PAGE>
uBID, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
for its stock based compensation plans, as permitted by Financial Accounting
Standards Board Statement 123 (SFAS 123) "Accounting for Stock Based
Compensation."
NET LOSS PER SHARE
Basic net loss per share excludes dilution and is computed by dividing net
loss by the weighted average number of common shares outstanding during the
reported periods. Diluted net loss per share reflects the potential dilution
that could occur if stock options and other commitments to issue Common Stock
were exercised. During the periods ended December 31, 1997 and September 30,
1998, options to purchase 458,118 and 869,690 common shares were anti-dilutive
and have been excluded from the weighted average share computation.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of accounts receivable from individuals
and merchants located in the United States. Sales are generally made through
credit cards and are pre-approved. The Company maintains an allowance for
doubtful accounts receivable based upon the expected collectibility of
accounts receivable and potential credit losses. Such losses have been
immaterial.
CONCENTRATION OF VENDORS
The Company is dependent upon vendors to supply it with merchandise for sale
through the Company's Internet auctions. For the period from Inception to
December 31, 1997 one vendor, the Parent, accounted for approximately 100% of
net revenues from related product sales. For the nine-month period ended
September 30, 1998, the Parent accounted for approximately 11% of net revenues
from related product sales.
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
respective reporting periods. Actual results could differ from those
estimates.
STOCK SPLIT
On June 25, 1998, the Board of Directors effected a 100,000-for-one split of
the outstanding shares of the Company's Common Stock. All common shares and
per share data have been retroactively adjusted to reflect the stock split.
2. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Computer, machinery and
equipment.............. $ 64 $ 101
Computer software....... 267 306
---- -----
331 407
Less accumulated
depreciation and
amortization........... (4) (105)
---- -----
$327 $ 302
==== =====
</TABLE>
F-9
<PAGE>
uBID, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. RELATED PARTY TRANSACTIONS
Since Inception, the Parent has provided advances to the Company for working
capital and fixed asset purchases of $670 and $3,709 through December 31, 1997
and September 30, 1998, respectively. The advances bear interest at the prime
rate (8.5% at December 31, 1997 and September 30, 1998). Interest expense was
$26 and $159 for the period ended December 31, 1997 and the nine months ended
September 30, 1998, respectively. The Company participates in the Parent's
cash management process. In connection therewith, cash receipts related to the
Company's business are applied directly to reduce the Advances from the
Parent.
It is the Parent's intention to continue to fund these cash needs and will
not require repayment of the advances for the foreseeable future, and in any
case through December 1, 1999. When the Company completes its anticipated
initial public offering of Common Stock (see Note 6), the then outstanding
balance payable to the Parent will be converted to an interest only note at
prime with the principal due 18 months from the IPO date.
In addition, the Parent provides various services such as administration
(accounting, human resources, legal), warehousing and distribution (through
June 1998), Internet/telecom and joint marketing to the Company. In
consideration for those services, the Parent has historically allocated a
portion of its overhead costs related to such services to the Company. The
charges for these services were:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1997 NINE-MONTH
(INCEPTION) TO PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------- -------------
<S> <C> <C>
Administrative................................ $ 36 $ 353
Warehousing and distribution.................. -- 417
Internet/telecom and joint marketing.......... 172 640
---- ------
$208 $1,410
==== ======
</TABLE>
Administration costs for services provided by the Parent to the Company were
determined by identifying all of the Parent's personnel who supported the
Company. Their pay, based on the number of hours of service provided,
benefits, plus an allocation of overhead, was used to calculate these costs.
Credit card processing for transactions above a certain dollar amount was
based on $1.50 per order. Prior to June 30, 1998, warehousing and distribution
was charged at $4.00 per order and was based on the Parent's fully burdened
cost per order for warehousing and distribution. Effective July 1, 1998 the
Company began subleasing 50,000 square feet of warehouse space from the Parent
at the Parents marginal cost. In October 1998, the sublease was increased to
100,000 square feet at the same terms. The Company is also charged a pro-rata
share, based on square footage, of the warehouse utilities, property taxes,
and other warehouse costs. Direct labor to operate the warehouse was charged
directly to the Company. Internet/telecom service costs includes an allocation
of monthly depreciation for all hardware and software based on usage by the
Company, as well as monthly rates for telecommunication expenses consumed by
the Company. Management asserts that the methods to identify and allocate
costs to the Company for these services provided by the Parent are reasonable.
One of the Company's officers and one of its directors also serve as an
officer and a director, respectively, of the Parent.
4. INCOME TAXES
No tax benefit has been provided for the periods ended December 31, 1997 and
September 30, 1998 pretax losses due to the uncertainty of realization of
these benefits in future years.
F-10
<PAGE>
uBID, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes differed from the amount computed by applying
the U.S. federal statutory rate to income (loss) before income taxes due to
the effects of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Expected taxes at federal statutory tax rate... 34.0% 34.0%
Nonrecognition of tax benefits................. (34.0) (34.0)
----- -----
-- % -- %
===== =====
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Deferred tax assets:
Start-up and development costs................ $ 105 $ 89
Net operating loss............................ 10 1,216
Other......................................... 10 12
----- ------
125 1,317
Valuation allowance........................... (125) 1,317
----- ------
$ -- $ --
===== ======
</TABLE>
5. EMPLOYEE BENEFITS
401(k) SAVINGS PLAN
The Parent has a 401(k) Savings Plan which covers substantially all Company
full-time employees. Participants may make tax-deferred contributions of up to
15% of annual compensation (subject to other limitations specified by the
Internal Revenue Code). Administrative and matching costs, which are charged
to the Company by the Parent, were not significant for the period from
Inception to December 31, 1997 and for the nine-month period ended September
30, 1998.
EMPLOYEE STOCK OPTION PLANS
The Company has granted non-qualified options to certain employees and a
director of the Company to purchase Common Stock. All of the options granted
are exercisable only in the event of an Initial Public Offering (IPO) or a
Sale or Merger, as defined. Accordingly, no options were exercisable at
December 31, 1997 or September 30, 1998. The terms of the options provide for
vesting, generally over a 5-year period, except for options to purchase
183,247 shares of common stock at September 30, 1998 which vest as to 20% of
the shares covered by such options upon completion of an IPO. The options
expire 10 years from the date of grant.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE
------- ----------------
<S> <C> <C>
Granted........................................ 458,118 $0.27
Canceled....................................... --
Exercised...................................... --
-------
Outstanding at December 31, 1997............. 458,118 $0.27
Granted........................................ 414,137 $1.19
Canceled....................................... (2,565) $0.27
Exercised...................................... --
-------
Outstanding at September 30, 1998............ 869,690 $0.71
=======
</TABLE>
The options outstanding at December 31, 1997 all have an exercise price of
$0.27. Of the options granted during the nine months ended September 30, 1998,
options to purchase 373,090, 18,325, 1,832 and
F-11
<PAGE>
uBID, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
20,890 common shares have exercise prices of $0.27, $6.82, $10.20 and $11.79,
respectively. Options at September 30, 1998 have a weighted average remaining
contractual life of 5.95 years.
Since the options can be exercised only upon the occurrence of either an IPO
or Sale or Merger, as defined, a measurement date as defined by APB 25, has
not yet occurred.
If the Company completes the pending IPO, a measurement date will occur as
of the effective date of the IPO, and the Company will be required to compute
compensation expense based upon the difference between the exercise price of
the options and the IPO price. Based upon the difference between the assumed
IPO price of $13.50 per share contained in the prospectus for the pending IPO,
and the exercise prices of the 1,038,278 options outstanding at November 16,
1998, the total compensation charge will be approximately $11.7 million, which
will be recognized over the vesting period. Assuming the IPO is completed at
December 31, 1998, the compensation charge at that date will be approximately
$5.3 million.
The fair value of each stock option grant has been estimated pursuant to
SFAS No. 123 on the date of grant using the minimum value method with the
following weighted average assumptions:
<TABLE>
<S> <C>
Risk free interest rate 6.3%
Expected dividend yield none
Expected lives 6 years
Expected volatility 1
</TABLE>
The weighted average grant date fair values of options granted under the
Plans during the nine months ended September 30, 1998 and the period from
Inception to December 31, 1997 were $0.37 and $0.08, respectively.
Since all options are exercisable only in the event of an IPO or Sale or
Merger, as defined, no compensation expense would be recorded for these Plans
in accordance with SFAS No. 123, since it is not probable that such awards
will be earned.
1998 STOCK INCENTIVE PLAN
In August 1998, the Company's Board of Directors adopted the 1998 Stock
Incentive Plan (the 1998 Plan) and reserved 1,832,470 shares of Common Stock
for issuance thereunder. The plan authorized the award of options, stock
appreciation rights, restricted stock awards and performance based stock
awards (each an Award). The maximum number of shares with respect to options
and stock appreciation rights granted to any employee in any fiscal year is
476,442 shares. Options granted under the Plan may be either incentive stock
options (ISO's) or nonqualified stock options (NSO'S). ISO's may be granted
only to employee (including officers and directors who are also employees).
Awards other than ISO's may be granted to employees, directors and
consultants, as defined.
Options under the Plan may be granted for periods up to ten years and at
prices no less than 85% of the fair value of the shares on the date of grant
provided, however, that the exercise price of an ISO may not be less than 100%
of the fair market value of the shares on the date of grant and the exercise
price of an ISO granted to a 10% shareholder may not be less than 110% of the
fair market value of the shares on the date of grant.
There have been no options granted under the Plan through September 30,
1998.
6. INITIAL PUBLIC OFFERING OF COMMON STOCK
In July 1998, the Company filed a Registration Statement to register up to
1,817,000 shares of its Common Stock for an initial public offering ("IPO").
Following the completion of the IPO, the Parent will continue to
F-12
<PAGE>
uBID, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
own approximately 82% of the Company's outstanding Common Stock and as a
result, will continue to control the Company. The Parent also announced that,
subsequent to the completion of the anticipated IPO, it intends to distribute
to the Parent's shareholders in 1999, subject to certain conditions and
consents, all of the Parent's remaining equity interest in the Company
("Distribution").
The Company and the Parent entered into on or prior to the consummation of
the IPO, certain agreements governing various interim and ongoing
relationships, including subleasing a portion of the Parent's warehouse,
between the Company and the Parent after the completion of the anticipated IPO
and subsequent Distribution. The terms of such agreements will generally
provide for services to be rendered by the Parent similar to those described
in Note 3. The costs of general accounting services, payroll and benefits
administration, and internet/telecommunications will be charged based on the
Parent's cost plus 10%. Credit services will be charged at $1.50 per
transaction. For warehousing and distribution, effective July 1, 1998, the
Company is subleasing a portion of the Parent's distribution facility pursuant
to a sublease agreement and is being charged a pro rata portion of the
Parent's occupancy costs for this facility. Pursuant to the Sublease
Agreement, future minimum lease payments to the Parent are $275,000 annually
in 1999 through 2002 and $206,000 in 2003. The rates or amounts to be paid by
the Company under these agreements are not expected to be materially different
than the rates or amounts currently being charged by the Parent.
7. RESTATEMENT OF CAPITAL ACCOUNTS
On November 28, 1998, the Board of Directors approved a reverse stock split
of approximately 0.732988-for-one of the Company's outstanding Common Stock.
All common shares and per share data have been retroactively adjusted to
reflect this reverse stock split.
F-13
<PAGE>
GOING ONCE......
[color photo of Customers select a bargain [color photo
product page from the that catches their eye from of
Company's Website] uBID'S easy-to-navigate list registration
of products in many different form]
categories. They click on the
"Bid Now!" button and select
how many of that product they
want and the amount they want
to bid. If this is their first
time visiting uBID, they will
be asked to complete a simple
registration form. Registering
with uBID is always FREE!
GOING TWICE.......
[color photo of During a live auction, [color photo
product bid page from customers can track the status of e-mail
the Company's Website] of their bid(s) at their from the
personalized uBID "My Page." Company to a
In addition, uBID customer]
automatically sends out a
"u've Been Outbid" e-mail to
notify customers when they no
longer have a winning bid.
Customers simply click a link
directly from this e-mail to
visit the uBID storefront and
increase their bid.
SOLD!
[color photo of e- If a customer has one of the [color photo
mails from the winning bids at the end of the of customer
Company to a auction, the product is receiving
customer] theirs! Most often, uBID ships box]
their merchandise the next
day! All the details of a
customer's order will be sent
to them via e-mail, as well.
Repeat customers accounted for
approximately 68% of customer
orders for the three months
ended September 30, 1998.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THIS OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS
OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Separation from the Parent................................................ 23
Use of Proceeds........................................................... 25
Dividend Policy........................................................... 25
Capitalization............................................................ 26
Dilution.................................................................. 27
Selected Financial Data................................................... 29
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 30
Business.................................................................. 35
Management................................................................ 46
Certain Transactions...................................................... 54
Principal Stockholder..................................................... 61
Description of Capital Stock.............................................. 62
U.S. Federal Income Tax Consequences of the Distribution.................. 66
Shares Eligible for Future Sale........................................... 68
Underwriting.............................................................. 69
Legal Matters............................................................. 70
Experts................................................................... 70
Available Information..................................................... 71
Index to Financial Statements............................................. F-1
</TABLE>
----------------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,580,000 SHARES
[LOGO OF uBID APPEARS HERE]
COMMON STOCK
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
WILLIAM BLAIR & COMPANY
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Other expenses in connection with the issuance and distribution of the
securities to be registered hereunder, all of which will be paid by the
registrant, will be substantially as follows:
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- ----------
<S> <C>
SEC registration fee................................................ $ 7,504
NASD filing fee..................................................... $ 3,044
Nasdaq National Market fee*......................................... $ 75,625
Accounting fees and expenses*....................................... $ 240,000
Legal fees and expenses*............................................ $ 425,000
Blue Sky fees and expenses*......................................... $ 7,500
Printing and engraving expenses*.................................... $ 225,000
Transfer Agent and Registrar fees and expenses*..................... $ 15,000
Miscellaneous fees and expenses*.................................... $ 1,327
----------
Total*.............................................................. $1,000,000
==========
</TABLE>
- --------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL provides that a corporation may indemnify directors
and officers as well as other employees and individuals against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
in connection with specified actions, suits or proceedings, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation, a "derivative action") if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. A similar standard is applicable in the case of derivative actions,
except that indemnification only extends to expenses (including attorneys'
fees) incurred in connection with the defense or settlement of such actions,
and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's bylaws, disinterested
director vote, stockholder vote, agreement or otherwise.
The Company's Certificate of Incorporation and Bylaws provide that the
Company will indemnify its directors and officers, and may indemnify any of
its employees and agents, to the fullest extent permitted by Delaware law. The
Company is generally required to indemnify its directors and officers for all
judgments, fines, penalties, settlements, legal fees and other expenses
incurred in connection with pending, threatened or completed legal proceedings
because of the director's or officer's position with the Company or another
entity that the director or officer serves at the Company's request, subject
to certain conditions and to advance funds to its directors and officers to
enable them to defend against such proceedings.
The DGCL permits a corporation to provide in its certificate of
incorporation that 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 for (i) any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii)
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) payments of unlawful dividends or unlawful
stock repurchases or redemptions, or (iv) any transaction from which the
director derived an improper personal benefit.
II-1
<PAGE>
The Certificate of Incorporation contains a provision that is designed to
limit the director's liability to the extent permitted by the DGCL and any
amendments thereto. Specifically, directors will not be held liable to the
Company or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability as a result of: (i) any breach of the
duty of loyalty to the Company or its stockholders; (ii) actions or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) payment of an improper dividend or improper repurchase
of the Company's stock under Section 174 of the DGCL; or (iv) actions or
omissions pursuant to which the director received an improper personal
benefit. The principal effect of the limitation of liability provision is that
a stockholder is unable to prosecute an action for monetary damages against a
director of the Company unless the stockholder can demonstrate one of the
specified bases for liability. The provision, however, does not eliminate or
limit director liability arising in connection with causes of action brought
under the federal securities laws. The Certificate of Incorporation does not
eliminate a director's duty of care.
The Purchase Agreement provides for indemnification by the Underwriters of
the registrant, its directors and officers, and by the registrant of the
Underwriters, for certain liabilities, including liabilities arising under the
1933 Act, and affords certain rights of contribution with respect thereto.
The Separation and Distribution Agreement by and between the Company and the
Parent will provide for indemnification by the Company of the Parent and its
directors, officers and employees for certain liabilities, including
liabilities under the 1933 Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
As of September 30, 1998, options to purchase 869,690 shares of Common Stock
have been granted in reliance upon the exemption provided in Rule 701 of the
1933 Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1** Form of Purchase Agreement
3.1* Form of Restated Certificate of Incorporation of the Company
3.2** Form of Amended and Restated Bylaws of the Company
4.1** Form of the Company's Common Stock Certificate
4.2* Registration Rights Agreement by and between the Company and the
Parent, dated as of , 1998 (included as Exhibit A to Exhibit
10.1)
4.3* Registration Rights Agreement by and between the Company and Frank
Khulusi and Sam Khulusi, dated as of , 1998 (included as
Exhibit B to Exhibit 10.1)
5.1*** Opinion of Morrison & Foerster LLP
8.1* Opinion of PricewaterhouseCoopers LLP
10.1* Separation and Distribution Agreement by and between the Company and
the Parent, dated as of , 1998
10.2* Form of Services Agreement by and between the Company and the Parent
10.3** Tax Indemnification and Allocation Agreement by and between the
Company and the Parent, dated as of , 1998
10.4* Form of Joint Marketing Agreement by and between the Company and the
Parent
10.5** Form of Internet/Telecommunications Agreement by and between the
Company and the Parent
10.6** Employment Agreement between the Company and Gregory K. Jones
10.7** uBid Inc. 1998 Stock Incentive Plan
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.8* Sublease Agreement by and between the Company and the Parent, dated as
of July 1, 1998.
10.10** Agreement Restricting Transfer of Assets and Letter Agreement dated
September 23, 1998 by and between Deutsche Financial Services
Corporation and the Parent and the Company.
10.11* Software Purchase Agreement dated December 10, 1997
10.12* Letter Agreement by and between by and between the Company and David
Matthews dated September 9, 1998
10.13* Assignment and License Agreement by and between the Company and the
Parent
23.1* Consent of Ernst & Young LLP
23.2*** Consent of Morrison & Foerster LLP (included in Exhibit 5.1)
23.3* Consent of PricewaterhouseCoopers LLP (included in Exhibit 8.1)
27.1** Financial Data Schedule
</TABLE>
- --------
* Filed herewith.
** Filed previously.
*** To be filed by amendment.
(b) Financial Statement Schedules. The financial statement schedules have
been omitted because the information required to be set forth therein
is not applicable or is shown in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing of the Offering specified in the Purchase 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 1933 Act 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 Commission such indemnification is against
public policy as expressed in the 1933 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 1933 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 1933 Act, 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 1933 Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the 1933 Act, 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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Elk
Grove Village, State of Illinois, on November 30, 1998.
UBID, INC.
/s/ Gregory K. Jones
By: _________________________________
Gregory K. Jones
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
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/ Gregory K. Jones Chairman, President and November 30, 1998
____________________________________ Chief Executive Officer
Gregory K. Jones (Principal Executive
Officer)
/s/ Thomas E. Werner Vice President and Chief November 30, 1998
____________________________________ Financial Officer
Thomas E. Werner (Principal Financial and
Accounting Officer)
/s/ Frank F. Khulusi* Director November 30, 1998
____________________________________
Frank F. Khulusi
/s/ Howard A. Tullman* Director November 30, 1998
____________________________________
Howard A. Tullman
Director
____________________________________
Norman H. Wesley
*/s/ Gregory K. Jones
____________________________________
Gregory K. Jones
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
uBID, INC.
uBid, Inc., a Delaware corporation (the "Corporation"), hereby certifies:
1. That the name of the Corporation is uBid, Inc. The Corporation was
originally incorporated under the name uBid Corporation, and the original
Certificate of Incorporation and a Certificate of Amendment of the Certificate
of Incorporation of the Corporation were filed with the Secretary of State of
the State of Delaware on the 19th day of September, 1997, and the 25th day of
June, 1998, respectively.
2. This Restated Certificate of Incorporation restates, integrates and
further amends the provisions of the Certificate of Incorporation of the
Corporation and has been duly adopted in accordance with the provisions of
Sections 242 and 245 of the General Corporation Law of the State of Delaware by
resolution of the Board of Directors and the written consent of the sole
stockholder of the Corporation in lieu of a meeting in accordance with Section
141(f) and Section 228(a), respectively, of the General Corporation Law of the
State of Delaware.
3. The Certificate of Incorporation, as heretofore amended, is hereby
further amended and restated to read in its entirety as follows:
ARTICLE I
The name of the corporation is uBid, Inc. (the "Corporation").
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, 19801, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
ARTICLE III
The nature of the business of the Corporation and the objects or purposes
to be transacted, promoted or carried on by it are as follows: to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
ARTICLE IV
The total number of shares of all classes of stock that this corporation is
authorized to issue is Twenty-Five Million (25,000,000) shares, consisting of
Twenty Million (20,000,000) shares of Common Stock with a par value of one-
hundredth of a cent ($.001) per share and Five
1
<PAGE>
Million (5,000,000) shares of preferred stock with a par value of one-hundredth
of a cent ($.001) per share ("Preferred Stock").
Any of the shares of Preferred Stock may be issued from time to time in one
or more series. Subject to the limitations and restrictions in this Article IV,
the Board of Directors or a Committee of the Board of Directors, to the extent
permitted by law and the bylaws of the Corporation or a resolution of the Board
of Directors, by resolution or resolutions, is authorized to create or provide
for any such series, and to fix the designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, including, without limitation, the authority to fix or
alter the dividend rights, dividend rates, conversion rights, exchange rights,
voting rights, rights and terms of redemption (including sinking and purchase
fund provisions), the redemption price or prices, the dissolution preferences
and the rights in respect to any distribution of assets of any wholly unissued
series of Preferred Stock and the number of shares constituting any such series,
and the designation thereof, or any of them and to increase or decrease the
number of shares of any series so created, subsequent to the issue of that
series but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
There shall be no limitation or restriction on any variation between any of
the different series of Preferred Stock as to the designations, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof; and the several series of
Preferred Stock may, except as hereinafter otherwise expressly provided in this
Article IV, vary in any and all respects as fixed and determined by the
resolution or resolutions of the Board of Directors or by Committee of the Board
of Directors, providing for the issuance of the various series; provided,
however, that all shares of any one series of Preferred Stock shall have the
same designation, preferences and relative, participating, optional or other
special rights and qualifications, limitations and restrictions.
Except as otherwise required by law, or as otherwise fixed by resolution or
resolutions of the Board of Directors with respect to one or more series of
Preferred Stock, the entire voting power and all voting rights shall be vested
exclusively in the Common Stock, and each stockholder of the Corporation who at
the time possesses voting power for any purpose shall be entitled to one vote
for each share of such stock standing in his or her name on the books of the
Corporation.
Upon filing of this Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware, each outstanding share of Common
Stock shall become .7329883 of a share of Common Stock.
ARTICLE V
The Board of Directors is expressly authorized to make, adopt, alter, or
repeal the bylaws of the Corporation.
2
<PAGE>
ARTICLE VI
A. Elections of members of the Board of Directors need not be by written
ballot unless the bylaws of the Corporation shall so provide.
B. The Board of Directors shall be divided into three classes, designated
Class I, Class II, and Class III, as nearly equal in number as the then total
number of directors permits. At the 1998 annual meeting of stockholders, Class I
directors shall be elected for a one-year term, Class II directors for a two-
year term and Class III directors for a three-year term. At each succeeding
annual meeting of stockholders beginning in 1999, successors to the class of
directors whose terms expires at that annual meeting shall be elected for a
three-year term. If the number of directors is changed, any increase or decrease
shall be apportioned among the classes so as to maintain the number of directors
in each class as nearly equal as possible, and any additional directors of any
class elected to fill a vacancy resulting from an increase in such class shall
hold office for a term that shall coincide with the remaining term of that
class, but in no case will a decrease in the number of directors shorten the
term of any incumbent director. Notwithstanding the foregoing, whenever the
holders of any one or more classes or series of Preferred Stock issued by the
Corporation shall have the right, voting separately by class or 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 the bylaws of the Corporation applicable thereto, and
such directors so elected shall not be divided into classes pursuant to this
Article VI unless expressly provided by such terms.
ARTICLE VII
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof, or on the application of
any receiver or receivers appointed for this Corporation under the provisions of
Section 291 of Title 8 of the General Corporation Law of the State of Delaware
or on the application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of Section 279 of Title 8 of
the General Corporation Law of the State of Delaware order a meeting of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing three-
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
3
<PAGE>
ARTICLE VIII
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Restated Certificate of Incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ARTICLE IX
To the fullest extent permitted by Delaware statutory or decisional law, as
amended or interpreted, a director of this 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 (i) liability based on a breach of the
duty of loyalty to the Corporation or the stockholders; (ii) liability for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law; (iii) liability based on the payment of an improper
dividend or an improper repurchase of the Corporation's stock under Section 174
of the General Corporation Law of the State of Delaware; or (iv) liability for
any transaction from which the director derived an improper personal benefit.
If the General Corporation Law of the State of Delaware hereafter is amended to
authorize the further elimination or limitation of the liability of directors,
then the liability of a director of the Corporation, in addition to the
limitation on personal liability provided herein, shall be limited or eliminated
to the fullest extent permitted by the General Corporation Law of the State of
Delaware, as so amended. Any repeal of this Article IX as a matter of law or
any modification of this Article IX by the stockholders of the Corporation shall
be prospective only, and shall not adversely affect any limitation on the
personal liability of a director of the Corporation existing at the time of such
repeal or modification.
ARTICLE X
A. Each person who was or is a party or is threatened to be made a party
to or is involved (as a party, witness, or otherwise), in any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (hereinafter a "Proceeding"), by reason of the
fact that he or she, or a person of whom he or she is the legal representative,
is or was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee, or agent of another
corporation or of a partnership, joint venture, trust, or other enterprise,
including service with respect to employee benefit plans, whether the basis of
the Proceeding is alleged action in an official capacity as a director or
officer or in any other capacity while serving as a director or officer shall be
indemnified and held harmless by the corporation to the fullest extent
authorized by the General Corporation Law of the State of Delaware, as the same
exists or may hereafter be amended or interpreted (but, in the case of any such
amendment or interpretation, only to the extent that such amendment or
interpretation permits the Corporation to provide broader indemnification rights
than were permitted prior thereto) against all expenses, liability, and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties,
and amounts paid or to be paid in settlement, and any interest, assessments, or
other charges imposed thereon, and any federal, state, local, or foreign taxes
imposed on any director or officer as a result of the actual or deemed
4
<PAGE>
receipt of any payments under this Article) reasonably incurred or suffered by
such person in connection with investigating, defending, being a witness in, or
participating in (including on appeal), or preparing for any of the foregoing
in, any Proceeding (hereinafter "Expenses").
B. Each person who was or is a party or is threatened to be made a party
to or is involved (as a party, witness, or otherwise), in any Proceeding, by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was an employee or agent of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee, or
agent of another corporation or of a partnership, joint venture, trust, or other
enterprise, including service with respect to employee benefit plans, whether
the basis of the Proceeding is alleged action in an official capacity as an
employee, or agent or in any other capacity while serving as an employee or
agent, may, at the discretion of the Board of Directors and upon such terms and
conditions as the Board of Directors deems appropriate, be indemnified and held
harmless by the corporation to the fullest extent authorized by the General
Corporation Law of the State of Delaware, as the same exists or may hereafter be
amended or interpreted (but, in the case of any such amendment or
interpretation, only to the extent that such amendment or interpretation permits
the Corporation to provide broader indemnification rights than were permitted
prior thereto) against all Expenses reasonably incurred or suffered by such
person in connection with investigating, defending, being a witness in, or
participating in (including on appeal), or preparing for any of the foregoing
in, any Proceeding; provided, however, that except as to actions to enforce
indemnification rights, the Corporation shall indemnify any employee or agent
seeking indemnification in connection with a Proceeding (or part thereof)
initiated by such person only if the Proceeding (or part thereof) was authorized
by the Board of Directors of the Corporation.
C. Expenses incurred by an officer or director (acting in his capacity
as such) in defending a Proceeding shall be paid by the Corporation in advance
of the final disposition of such Proceeding, provided, however, that if required
by the General Corporation Law of the State of Delaware, as amended, such
Expenses shall be advanced only upon delivery to the Corporation of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he or she is not entitled to be
indemnified by the Corporation as authorized in this Article X or otherwise.
Expenses incurred by employees or agents of the Corporation (or by the directors
or officers not acting in their capacity as such, including service with respect
to employee benefit plans) may be advanced upon such terms and conditions as the
Board of Directors deems appropriate. Any obligation to reimburse the
Corporation for Expense advances shall be unsecured and no interest shall be
charged thereon.
ARTICLE XI
A. Special meetings of stockholders of the Corporation may be called
only by the President and Chief Executive Officer or the Board of Directors
pursuant to a resolution approved by a majority of the entire Board of
Directors.
5
<PAGE>
B. Any action required or permitted to be taken by the stockholders of
the Corporation must be effected at a duly called annual or special meeting of
stockholders and may not be effected by any consent in writing by such
stockholders.
ARTICLE XIII
Any amendment, change or repeal of any provision of this Restated
Certificate of Incorporation that will have the effect of permitting
circumvention or modifying Article VI or XI, shall require the favorable vote,
at a stockholders' meeting, of the holders of at least 80% of the then-
outstanding shares of stock of the Corporation entitled to vote.
IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of
Incorporation to be signed by its duly authorized officer, this ____ day of
November ___, 1998.
uBID, INC.
By:
------------------------------------
Tim Takesue
Vice President
6
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF PRICEWATERHOUSECOOPERS LLP]
Creative Computers, Inc.
2555 West 190th Street
Torrance, California 90504
August 28, 1998
To the Board of Directors and Shareholders:
You have requested our opinion on behalf of Creative Computers, Inc. (DE)
("Holdings") and its shareholders regarding the material federal income tax
consequences resulting from (i) the distribution of the stock of uBid, Inc.
("uBid") by Creative Computers, Inc. (CA) ("Creative") to Holdings, and (ii) the
distribution of the stock of uBid by Holdings to its shareholders (together, the
"Distribution"). The distribution described in (i), above, will be preceded by
an initial public offering of the stock of uBid.
The Distribution will separate the direct sales business of Holdings and
Creative (the "Direct Sales Business") from the auction sales business of uBid
(the "Auction Sales Business"), resulting in two public companies. As more
fully described below, the primary business purposes for the Distribution are
(i) to allow uBid to raise substantially more capital through a public offering
of its stock, (ii) to retain key employees, including the Chief Executive
Officer of uBid, by allowing such key employees to participate in the corporate
growth of uBid while uBid is a stand alone publicly traded entity, and (iii) to
resolve certain vendor/competitor conflicts that have arisen between the Direct
Sales Business and the Auction Sales Business.
Opinions Requested
------------------
Specifically, you have asked us to address the following issues:
With respect to the distribution of uBid by Creative to Holdings:
1. Whether the contribution by Creative of rights to use certain software
to uBid, followed by the distribution by Creative of all of its uBid stock,
will qualify as a reorganization within the meaning of section 368(a)(1)(D)
of the Code.
<PAGE>
2. Whether gain or loss will be recognized to Creative upon the distribution of
all the common stock of uBid to Holdings;
3. Whether gain or loss will be recognized to (and no amount will be included
in the income of) Holdings upon the receipt of the uBid common stock
distributed to Holdings in the distribution;
4. Whether the aggregate basis of the stock of Creative and uBid in the hands
of Holdings after the distribution will, in each instance, be the same as
the basis of the Creative stock held by Holdings immediately before the
distribution, allocated in proportion to the fair market value of each in
accordance with Treas. Reg. section 1.358-2(a)(2); and
5. Whether proper allocation of earnings and profits among Creative and uBid
will be required pursuant to Treas. Reg. section 1.312-10(b).
With respect to the distribution of uBid by Holdings to the Holdings'
shareholders:
6. Whether gain or loss will be recognized to Holdings upon the distribution
of all the common stock of uBid to the shareholders of Holdings;
7. Whether gain or loss will be recognized to (and no amount will be included
in the income of) the shareholders of Holdings upon the receipt of the uBid
common stock distributed to them (including any fractional share interests
of uBid stock to which they may be entitled) in the distribution;
8. Whether the aggregate basis of the stock of Holdings and uBid in the hands
of each Holdings' shareholder (including any fractional share interests of
uBid stock to which they may be entitled) after the distribution will, in
each instance, be the same as the basis of the Holdings' stock held by such
shareholder immediately before the distribution, allocated in proportion to
the fair market value of each in accordance with Treas. Reg. section 1.358-
2(a)(2);
9. Whether the holding period of the uBid stock which each Holdings'
shareholder receives (including any fractional share interests of uBid
stock to which they may be entitled) will include the holding period of the
Holdings' common stock with respect to which the distribution will be made,
provided the Holdings' stock is held as a capital asset by such shareholder
on the date of the distribution;
(2)
<PAGE>
10. If cash is received by a Holdings' shareholder in lieu of fractional share
interests of uBid common stock, whether such fractional share will be
treated as having been issued and then redeemed by such shareholder in a
redemption with gain (or loss) recognized subject to the provisions and
limitations of section 302; and
11. Whether proper allocation of earnings and profits among Holdings and uBid
will be required pursuant to Treas. Reg. section 1.312-10(b).
Conclusions
-----------
Our opinions are based solely upon:
a) The material facts being as described in Amendment No. 1 to the
initial Form S-1 Registration Statement of uBid dated July 24, 1998 as
filed with the Securities and Exchange Commission;
b) The Distribution and the other transactions contemplated by the plan of
reorganization being effected in accordance with the representations and
assumptions below and the terms set forth in the documents reviewed; and
c) The assumptions and representations made and contained herein being true,
correct and complete;
It is our opinion, based upon the facts, assumptions, and representations
contained herein, that:
With respect to the distribution of uBid by Creative to Holdings:
1. The contribution by Creative of rights to use certain software to
uBid, followed by the distribution by Creative of all of its uBid
stock, will qualify as a reorganization within the meaning of section
368(a)(1)(D) of the Code. Creative and uBid will each be a "party to
the reorganization" within the meaning of section 368(b).
2. No gain or loss will be recognized to Creative upon the distribution
of all the common stock of uBid to Holdings. Section 355(c).
3. No gain or loss will be recognized to (and no amount will be included
in the income of) Holdings upon the receipt of the uBid common stock
distributed to Holdings in the distribution. Section 355(a)(1).
(3)
<PAGE>
4. The aggregate basis of the stock of Creative and uBid in the hands of
Holdings after the distribution will, in each instance, be the same as
the basis of the Creative stock held by Holdings immediately before
the distribution, allocated in proportion to the fair market value of
each in accordance with Treas. Reg. section 1.358-2(a)(2). Section
358(b)(1) and (2).
5. Proper allocation of earnings and profits among Creative and uBid will
be required pursuant to Treas. Reg. section 1.312-10(b). Section
312(h).
With respect to the distribution of uBid by Holdings to the Holdings'
shareholders:
6. No gain or loss will be recognized to Holdings upon the distribution
of all the common stock of uBid to the shareholders of Holdings.
Section 355(c).
7. No gain or loss will be recognized to (and no amount will be included
in the income of) the shareholders of Holdings upon the receipt of the
uBid common stock distributed to them (including any fractional share
interests of uBid stock to
which they may be entitled) in the distribution. Section 355(a)(1).
8. The aggregate basis of the stock of Holdings and uBid in the hands of
each Holdings' shareholder (including any fractional share interests
of uBid stock to which they may be entitled) after the distribution
will, in each instance, be the same as the basis of the Holdings'
stock held by such shareholder immediately before the distribution,
allocated in proportion to the fair market value of each in accordance
with Treas. Reg. section 1.358-2(a)(2). Section 358(b)(1) and (2).
9. The holding period of the uBid stock which each Holdings' shareholder
receives (including any fractional share interests of uBid stock to
which they may be entitled) will include the holding period of the
Holdings' common stock with respect to which the distribution will be
made, provided the Holdings' stock is held as a capital asset by such
shareholder on the date of the distribution. Section 1223(1).
10. Where cash is received by a Holdings' shareholder in lieu of
fractional share interests of uBid common stock, such fractional share
will be treated as having been issued and then redeemed by such
shareholder. The Holding's shareholder receiving cash in lieu of
fractional shares will recognize gain (or loss) subject to the
provisions and limitations of section 302.
(4)
<PAGE>
11. Proper allocation of earnings and profits among Holdings and uBid will
be required pursuant to Treas. Reg. section 1.312-10(b). Section
312(h).
Proposed Transactions
---------------------
The following transactions will or have been undertaken in connection with the
distribution by Holdings of the stock of uBid:
1. Creative and uBid will enter into certain agreements for purposes of shared
services between the two corporations following the spin-off.
2. Holdings and uBid will enter into one or more tax sharing and
disaffiliation agreements.
3. Creative will contribute rights to use certain software to uBid.
4. uBid will offer its common stock to the public in its initial public
offering. Immediately prior to the distribution of uBid common stock by
Creative to Holdings and then Holdings to its shareholders, the common
stock, considered together with any uBid common stock issued through pre-
spin-off option exercises, will represent less than 20 percent of uBid's
common stock and there will be no other shares of uBid stock outstanding.
5. uBid will repay to Creative its intercompany indebtedness to Creative,
which was generated in the ordinary course of business.
6. No earlier than six months but no later than twelve months from uBid's
initial public offering, Creative will distribute all of its uBid stock to
Holdings in a tax-free distribution under section 355.
7. Holdings will distribute all its uBid stock to Holdings' shareholders.
8. Following the Distribution, uBid may complete an additional public offering
of its stock if it encounters additional capital needs. No such follow-on
offering is currently planned at this time; however, if management begins
consideration of a follow-on offering prior to the Distribution, in no
event will such follow-on offering occur prior to the Distribution. If a
follow-on offering of uBid's stock occurs after the Distribution, such
offering will not violate the representations contained elsewhere within
this letter.
(5)
<PAGE>
No other transactions other than those disclosed above are being undertaken by
either Creative, uBid, or Holdings in connection with the proposed transaction.
Representations
---------------
The following representations have been made in connection with the proposed
transactions by the relevant parties and are attached hereto. If any one of
these representations is determined to not be true, accurate, and complete, our
opinions on the proposed transactions could change.
1. Holdings, Creative, uBid, and the shareholders of Holdings will each
pay their own expenses, if any, incurred in connection with the
Distribution.
2. Any indebtedness owed by uBid to Creative after the Distribution will
not constitute stock or securities.
3. No part of the consideration to be distributed by Holdings or Creative
is being received by a shareholder as a creditor, employee, or in any
capacity other than that of a shareholder of the distributing
corporation.
4. The 5 years of financial information submitted on behalf of Creative
is representative of Creative's present operation, and with regard to
Creative, there have been no substantial operational changes since the
date of the last financial statements.
5. The financial information submitted on behalf of the Auction Sales
Business (for each year of its existence) is representative of the
Auction Sales Business' present operations, and with regard to the
Auction Sales Business, there have been no substantial operational
changes since the date of the last financial statements submitted.
6. Immediately after the Distribution, at least 90 percent of the fair
market value of the gross assets of Holdings will consist of the stock
and securities of Creative and Computability Limited.
7. Following the Distribution, other than uBid's use of certain Creative
employees for which uBid will compensate Creative at an arms length
price, Holdings, Creative
(6)
<PAGE>
and uBid will each continue the active conduct of its business,
independently and with its separate employees.
8. The distribution of the stock of uBid is carried out for the following
corporate business purposes: (i) to attract and retain key employees,
(ii) to facilitate an offering of the stock of uBid, and (ii) to
resolve certain competitive restraints with vendors. The distribution
of the stock, or stock and securities, of uBid is motivated, in whole
or substantial part, by one or more of these corporate business
purposes.
9. There is no plan or intention by any shareholder who owns five percent
or more of the stock of Holdings, and the management of Holdings, to
the best of its knowledge, is not aware of any plan or intention on
the part of any particular remaining shareholder of Holdings to sell,
exchange, transfer by gift, or otherwise dispose of any stock in, or
securities of, either Holdings or uBid after the Distribution.
10. There is no plan or intention by either Holdings or uBid, directly or
through any subsidiary corporation, to purchase any of its outstanding
stock after the Distribution.
11. There is no plan or intention to liquidate either Holdings, Creative
or uBid, to merge any of the corporations with any other corporation,
or to sell or otherwise dispose of the assets of any of the
corporations after the Distribution, except in the ordinary course of
business.
12. Holdings, Creative, and uBid neither accumulated their receivables nor
made extraordinary payments of their payables in anticipation of the
Distribution.
13. Other than trade account indebtedness created in the ordinary course
of business through continuing arms-length transactions or through
execution of certain intercompany agreements entered into between
Holdings, Creative, and uBid, no intercorporate debt will exist
between Holdings, Creative, and uBid at the time of, or subsequent to,
the distribution of uBid's stock.
14. Immediately before the distribution, items of income, gain, loss,
deduction, and credit will be taken into account as required by the
applicable intercompany transaction regulations.
(7)
<PAGE>
15. Payments made in connection with all continuing transactions between
Holdings, Creative, and uBid will be for fair market value based upon
terms and conditions arrived at by the parties bargaining at arm's
length.
16. No two parties to the transaction are investment companies as defined
in section 368(a)(2)(F)(iii) and (iv).
17. The payment of cash in lieu of fractional share interests of uBid
common stock, if any, is solely to avoid the expense and inconvenience
to Holdings of issuing fractional share interests, and does not
represent separately bargained for consideration. The total amount of
cash received in lieu of fractional share interests of uBid stock will
be less than 1 percent of the total fair market value of the uBid
stock distributed by Holdings.
18. The distribution of the stock of uBid by Creative and the distribution
of the stock of uBid by Holdings, will occur within twelve months from
the date of uBid's initial public offering.
19. Taking into account stock issued under uBid's stock option plan prior
to the distribution of uBid's stock, and uBid stock sold in uBid's
initial public offering, Creative will be in control of uBid, as
defined in section 368(c), at the time of Creative's distribution of
the uBid stock.
20. Taking into account stock issued under uBid's stock option plan prior
to the distribution of uBid's stock, and uBid stock sold in uBid's
initial public offering, Holdings will be in control of uBid, as
defined in section 368(c), at the time of Holdings' distribution of
the uBid stock.
21. In no event will 50 percent or more of the total combined voting power
of all classes of stock entitled to vote or 50 percent or more of the
total value of shares of all classes of stock of Holdings or uBid,
directly or indirectly, be offered to the public, acquired by or
issued to one or more persons, or issued through option exercises
during the four-year period beginning on the date which is two years
before the date of the Distribution, unless it is established that the
Distribution and the offering of the Holdings or uBid stock to the
public, the acquisition or issuance of the Holdings or uBid stock by
or to one or more persons, or the issuance of the Holdings or uBid
stock through option exercises are not pursuant to a plan or series of
related transactions.
(8)
<PAGE>
22. Following the four year period beginning two years before the date of
the Distribution, there is no plan or intention for 50 percent or more
of the total combined voting power of all classes of stock entitled to
vote or 50 percent or more of the total value of shares of all classes
of stock of Holdings or uBid, directly or indirectly, to be offered to
the public, acquired by or issued to one or more persons, or to be
issued through option exercises.
23. No liabilities will be transferred to uBid or assumed by uBid, and
other than the contribution of certain software contracts, no assets
will be transferred to uBid in connection with the distribution.
Caveats and Limitations
-----------------------
(1) The conclusions reached in this opinion represent and are based upon our
best judgment regarding the application of federal income tax laws arising
under the Code, existing judicial decisions, administrative regulations and
published rulings and procedures. This opinion is not binding upon the
Internal Revenue Service or the courts. It is our opinion that the
Internal Revenue Service should not assert a contrary position, although
this cannot be assured in the absence of a private letter ruling from the
Internal Revenue Service. Furthermore, no assurance can be given that
future legislative or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the
conclusions stated herein. PricewaterhouseCoopers LLP undertakes no
responsibility to advise any party or shareholder of any new developments
in the application or interpretation of the federal income tax laws.
(2) This opinion does not address any federal tax consequences of the
transactions set forth above, or transactions related or proximate to the
transactions set forth above, except as specifically set forth herein.
This opinion does not address the consequences to any of the shareholders
in the event of their disposition of Holdings or uBid stock at some future
time. This opinion does not address any issues with respect to
shareholders who received their stock as compensation. This opinion also
does not address any state, local, foreign, or other tax consequences that
may result from any of the transactions set forth above, or transactions
related to the transactions set forth above.
(3) This opinion does not address any transactions other than those described
above, or any transactions whatsoever, if all the transactions described
herein are not consummated as described herein without waiver or breach of
any material provision thereof or if the assumptions and representations
set forth herein are not true and
(9)
<PAGE>
accurate at all relevant times. In the event any one of the assumptions or
representations is incorrect, the conclusions reached in this opinion might
be adversely affected.
(4) This opinion is based on the transactions as described in the document
copies we reviewed (listed above). Should the actual documents contain
changes from the documents received, the conclusions in this opinion could
be adversely affected.
(5) PricewaterhouseCoopers LLP consents to referencing this opinion in uBid's
Form S-1 referred to above and to the filing of this opinion as an exhibit
to the Registration Statement. In addition, PricewaterhouseCoopers LLP
consents to similar use of this opinion in any proxy statement or
information statement distributed to Holdings' shareholders in connection
with the Distribution.
(6) We have relied upon the representations set forth in the transaction
documents regarding matters of law outside the tax area including, for
example, the validity of (1) the corporations involved in the proposed
transactions, and (2) the agreements including the appropriate filings of
each with the federal and state government agencies as appropriate.
* * * * * * * * * * * * * * *
If you have any questions, please call either Mark W. Boyer at (202) 414-1629 or
Albert A. Remeikis at (202) 414-1602.
Sincerely,
/s/ PricewaterhouseCoopers LLP
--------------------------------
PricewaterhouseCoopers LLP
Tax and Legal Services
(10)
<PAGE>
EXHIBIT 10.1
SEPARATION AND
DISTRIBUTION AGREEMENT
BY AND BETWEEN
CREATIVE COMPUTERS, INC.
AND
uBID, INC.
DATED AS OF
_____________, 1998
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SEPARATION AND DISTRIBUTION AGREEMENT
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THIS SEPARATION AND DISTRIBUTION AGREEMENT, dated as of __________, 1998,
is by and between Creative Computers, Inc. ("CCI") and uBid, Inc. ("uBid").
Capitalized terms used herein and not otherwise defined shall have the
respective meanings assigned to them in Article I hereof.
WHEREAS, the Board of Directors of CCI has determined that it is
appropriate and desirable, on the terms and conditions contemplated hereby, to
cause uBid to offer and sell for its own account in the IPO (as defined below) a
limited number of shares of uBid Common Stock, and subsequently for CCI to
distribute to holders of shares of CCI Common Stock the outstanding shares of
uBid Common Stock owned directly or indirectly by CCI;
WHEREAS, the Distribution (as defined below) is intended to qualify as a
tax-free spin-off under Section 355 of the Code (as defined below);
WHEREAS, CCI has provided various services to uBid on an informal basis and
in connection with the separation of CCI and uBid the parties desire to
formalize certain relationships which will continue on a transitional basis; and
WHEREAS, it is appropriate and desirable to set forth the principal
corporate transactions required to effect the separation, the IPO and the
Distribution and certain other agreements that will govern certain matters
relating to the IPO and the Distribution and the relationship of CCI and uBid
following the IPO and the Distribution.
NOW, THEREFORE, for good and valuable consideration, the sufficiency of
which is hereby acknowledged, the parties, intending to be legally bound, agree
as follows:
ARTICLE I
DEFINITIONS
For the purpose of this Agreement the following terms shall have the
following meanings:
1.1. ACTION means any demand, action, suit, countersuit, arbitration,
inquiry, proceeding or investigation by or before any federal, state, local,
foreign or international Governmental Authority or any arbitration or mediation
tribunal.
1.2. AFFILIATE of any Person means a Person that controls, is controlled
by, or is under common control with such Person. As used herein, "control" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such entity, whether through
ownership of voting securities or other interests, by contract or otherwise.
1.3. AGENT means the distribution agent to be appointed by CCI to
distribute to the stockholders of CCI pursuant to the Distribution the shares of
uBid Common Stock held by CCI.
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1.4. AGREEMENT means this Separation and Distribution Agreement, including
all of the Schedules hereto.
1.5. ANCILLARY AGREEMENTS means the Services Agreement,
Internet/Telecommunications Agreement and the Joint Marketing Agreement each in
the form set forth in Schedule 1.5.
1.6. APPLICABLE DEADLINE has the meaning set forth in Section 8.3(b).
1.7. ARBITRATION ACT means the United States Arbitration Act, 9 U.S.C. 1-
14, as the same may be amended from time to time.
1.8. ARBITRATION DEMAND DATE has the meaning set forth in Section 8.3(a).
1.9. ARBITRATION DEMAND NOTICE has the meaning set forth in Section 8.3(a).
1.10. CCI COMMON STOCK means the Common Stock, $.01 par value per share, of
CCI.
1.11. CCI GROUP means CCI and each Person (other than any member of the
uBid Group) that is an Affiliate of CCI immediately after the Closing Date.
1.12. CCI INDEMNITEES has the meaning set forth in Section 5.2.
1.13. CHANGE OF CONTROL of any Person means any of the following: (a) the
consummation of a merger, consolidation, or similar business combination
involving such Person, or a sale or other disposition of all or substantially
all of the assets of such Person; (b) the acquisition by any individual, entity
or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange
Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under
such Act) of 40% or more of either (i) the then outstanding shares of common
stock of such Person, or (ii) the combined voting power of the then outstanding
voting securities of such Person entitled to vote generally in the election of
directors; or (c) individuals who, as of the Distribution Date, constitute the
Board of Directors of such Person (the "Incumbent Board") cease for any reason
to constitute at least a majority of such Board; provided, however, that any
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individual becoming a director subsequent to the Distribution Date (other than
any such individual whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of any Person other than the Board) whose election or nomination
for election by the stockholders of such Person was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board.
1.14. CLOSING means the receipt by uBid of the net proceeds of the IPO in
accordance with the terms of the Underwriting Agreement.
1.15. CLOSING DATE means the first time at which any shares of uBid Common
Stock are sold to the Underwriters pursuant to the IPO in accordance with the
terms of the Underwriting Agreement.
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1.16. CODE means the Internal Revenue Code of 1986, as amended.
1.17. COMMISSION means the United States Securities and Exchange
Commission.
1.18. CONSENTS means any consent, waiver or approval from, or notification
requirements to, any third party.
1.19. CPR means the Center for Public Resources.
1.20. DISTRIBUTION means the distribution by CCI on a pro rata basis to
holders of CCI Common Stock of all of the outstanding shares of uBid Common
Stock owned by CCI on the Distribution Date as set forth in Article IV.
1.21. DISTRIBUTION DATE means the date determined pursuant to Section 3.1
on which the Distribution occurs.
1.22. EFFECTIVE IPO DATE means the date on which the IPO Registration
Statement is declared effective by the Commission.
1.23. EFFECTIVE TIME means 5:00 p.m., Eastern Standard Time or Eastern
Daylight Time (whichever shall be then in effect), on the Distribution Date.
1.24. ENVIRONMENTAL LAW means any federal, state, local, foreign or
international statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, common law (including tort and environmental
nuisance law), legal doctrine, order, judgment, decree, injunction, requirement
or agreement with any Governmental Authority, now or hereafter in effect
relating to health, safety, pollution or the environment (including ambient air,
surface water, groundwater, land surface or subsurface strata) or to emissions,
discharges, releases or threatened releases of any substance currently or at any
time hereafter listed, defined, designated or classified as hazardous, toxic
waste, radioactive or dangerous, or otherwise regulated, under any of the
foregoing, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of any such substances,
including the Comprehensive Environmental Response, Compensation and Liability
Act, the Superfund Amendments and Reauthorization Act and the Resource
Conservation and Recovery Act and comparable provisions in state, local, foreign
or international law.
1.25. ENVIRONMENTAL LIABILITIES means all Liabilities relating to, arising
out of or resulting from any Environmental Law or contract or agreement relating
to environmental, health or safety matters (including all removal, remediation
or cleanup costs, investigatory costs, governmental response costs, natural
resources damages, property damages, personal injury damages, costs of
compliance with any settlement, judgment or other determination of Liability and
indemnity, contribution or similar obligations) and all costs and expenses
(including allocated costs of in-house counsel and other personnel), interest,
fines, penalties or other monetary sanctions in connection therewith.
1.26. ESCALATION NOTICE has the meaning set forth in Section 8.2.
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1.27. EXCHANGE ACT means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
1.28. GOVERNMENTAL APPROVAL means any notice, report or other filing to be
made, or any consent, registration, approval, permit or authorization to be
obtained from, any Governmental Authority.
1.29. GOVERNMENTAL AUTHORITY shall mean any federal, state, local, foreign
or international court, government, department, commission, board, bureau,
agency, official or other regulatory, administrative or governmental authority.
1.30. INDEMNIFYING PARTY has the meaning set forth in Section 5.4(a).
1.31. INDEMNITEE has the meaning set forth in Section 5.4(a).
1.32. INDEMNITY PAYMENT has the meaning set forth in Section 5.4(a).
1.33. INFORMATION means information, whether or not patentable or
copyrightable, in written, oral, electronic or other tangible or intangible
forms, stored in any medium, including studies, reports, records, books,
contracts, instruments, surveys, discoveries, ideas, concepts, know-how,
techniques, designs, specifications, drawings, blueprints, diagrams, models,
prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes,
computer programs or other software, marketing plans, customer names,
communications by or to attorneys (including attorney-client privileged
communications), memos and other materials prepared by attorneys or under their
direction (including attorney work product), and other technical, financial,
employee or business information or data.
1.34. INSURANCE POLICIES means the insurance policies written by insurance
carriers unaffiliated with CCI pursuant to which uBid (or their respective
officers or directors) will be insured parties after the Closing Date.
1.35. INSURANCE PROCEEDS means those monies:
(a) received by an insured from an insurance carrier; or
(b) paid by an insurance carrier on behalf of the insured;
in any such case net of any applicable premium adjustments (including reserves
and retrospectively rated premium adjustments) and net of any costs or expenses
incurred in the collection thereof.
1.36. IPO means the initial public offering by uBid of shares of uBid
Common Stock pursuant to the IPO Registration Statement.
1.37. IPO REGISTRATION STATEMENT means the registration statement on Form
S-1 (No. 333-58447) filed under the Securities Act, pursuant to which the uBid
Common Stock to be issued in the IPO will be registered, together with all
amendments thereto.
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1.38. LIABILITIES means any and all losses, claims, charges, debts,
demands, actions, causes of action, suits, damages, obligations, payments, costs
and expenses, sums of money, accounts, reckonings, bonds, specialties,
indemnities and similar obligations, exonerations, covenants, contracts,
controversies, agreements, promises, doings, omissions, variances, guarantees,
make whole agreements and similar obligations, and other liabilities, including
all contractual obligations, whether absolute or contingent, matured or
unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown,
whenever arising, and including those arising under any law, rule, regulation,
Action, threatened or contemplated Action (including the costs and expenses of
demands, assessments, judgments, settlements and compromises relating thereto
and attorneys' fees and any and all costs and expenses (including allocated
costs of in-house counsel and other personnel), whatsoever reasonably incurred
in investigating, preparing or defending against any such Actions or threatened
or contemplated Actions), order or consent decree of any Governmental Authority
or any award of any arbitrator or mediator of any kind, and those arising under
any contract, commitment or undertaking, including those arising under this
Agreement or any Ancillary Agreement, in each case, whether or not recorded or
reflected or required to be recorded or reflected on the books and records or
financial statements of any Person.
1.39. PERSON means an individual, a general or limited partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a limited
liability entity, any other entity and any Governmental Authority.
1.40. PRIME RATE means the rate which Chase Manhattan Bank (or any
successor thereto or other major money center commercial bank agreed to by the
parties hereto) announces from time to time as its prime lending rate, as in
effect from time to time.
1.41. PROSPECTUS means each preliminary, final or supplemental prospectus
forming a part of the IPO Registration Statement.
1.42. RECORD DATE means the close of business on the date to be determined
by the CCI Board of Directors as the record date for determining stockholders of
CCI entitled to receive shares of uBid Common Stock in the Distribution.
1.43. REGISTRATION RIGHTS AGREEMENTS means the Registration Rights
Agreements, in the form of Exhibits A and B hereto, by and among CCI and uBid,
on the one hand, and Frank Khulusi, Sam Khulusi and uBid on the other.
1.44. SECURITIES ACT means the Securities Act of 1933, as amended, together
with the rules and regulations promulgated thereunder.
1.45. SECURITY INTEREST means any mortgage, security interest, pledge,
lien, charge, claim, option, right to acquire, voting or other restriction,
right-of-way, covenant, condition, easement, encroachment, restriction on
transfer, or other encumbrance of any nature whatsoever.
1.46. SUBSIDIARY OF ANY PERSON means any corporation or other organization
whether incorporated or unincorporated of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power to
elect at least a majority of the board of
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directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or controlled
by such Person or by any one or more of its Subsidiaries, or by such Person and
one or more of its Subsidiaries; provided, however, that no Person is not
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directly or indirectly wholly owned by any other Person shall be a Subsidiary of
such other Person unless such other Person controls, or has the right, power or
ability to control, that Person.
1.47. TAX INDEMNIFICATION AND ALLOCATION AGREEMENT means the Tax
Indemnification and Allocation Agreement, dated as of the date hereof, by and
among CCI and uBid.
1.48. TAXES has the meaning set forth in the Tax Indemnification and
Allocation Agreement.
1.49. THIRD PARTY CLAIM has the meaning set forth in Section 5.5(a).
1.50. uBID BUSINESS means the business of uBid as presently conducted.
1.51. uBID COMMON STOCK means Common Stock, $.001 par value per share, of
uBid.
1.52. uBID GROUP means uBid, each Subsidiary of uBid and each other Person
that is either controlled directly or indirectly by uBid immediately after the
Closing Date or that is contemplated to be controlled by uBid.
1.53. uBID INDEMNITEES has the meaning set forth in Section 5.3(a).
1.54. UNDERWRITERS means the managing underwriters for the IPO.
1.55. UNDERWRITING AGREEMENT means the underwriting agreement to be entered
into among uBid and the Underwriters with respect to the IPO.
ARTICLE II
THE IPO AND ACTIONS PENDING THE IPO
2.1. TRANSACTIONS PRIOR TO THE IPO. (a) Subject to the conditions specified
in Section 2.6, CCI and uBid shall use their reasonable best efforts to
consummate the IPO. Such actions shall include, but not necessarily be limited
to, those specified in this Section 2.1.
(b) uBid shall file the IPO Registration Statement, and such
amendments or supplements thereto, as may be necessary in order to cause the
same to become and remain effective as required by law or by the Underwriters,
including, but not limited to, filing such amendments to the IPO Registration
Statement as may be required by the Underwriting Agreement, the Commission or
federal, state or foreign securities laws. CCI and uBid shall also cooperate in
preparing, filing with the Commission and causing to become effective a
registration statement registering the uBid Common Stock under the Exchange Act,
and any registration statements or amendments thereof which are required to
reflect the establishment of,
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or amendments to, any employee benefit and other plans necessary or appropriate
in connection with the IPO, the Distribution or the other transactions
contemplated by this Agreement and the Ancillary Agreements.
(c) uBid and CCI shall enter into the Underwriting Agreement, in form
and substance reasonably satisfactory to uBid and CCI and shall comply with its
respective obligations thereunder.
(d) CCI and uBid shall consult with each other and the Underwriters
regarding the timing, pricing and other material matters with respect to the
IPO.
(e) uBid shall use its reasonable best efforts to take all such action
as may be necessary or appropriate under state securities and blue sky laws of
the United States (and any comparable laws under any foreign jurisdictions) in
connection with the IPO.
(f) uBid shall prepare, file and use reasonable best efforts to seek to
make effective, an application for listing of the uBid Common Stock issued in
the IPO on the NASDAQ Stock Market, subject to official notice of issuance.
(g) uBid shall participate in the preparation of materials and
presentations as the Underwriters shall deem necessary or desirable.
(h) uBid shall pay all third party costs, fees and expenses relating to
the IPO, all of the reimbursable expenses of the Underwriters pursuant to the
Underwriting Agreement, all of the costs of producing, printing, mailing and
otherwise distributing the Prospectus, as well as the Underwriters' discount as
provided in the Underwriting Agreement.
2.2. PROCEEDS OF THE IPO. The IPO will be a primary offering of uBid Common
Stock and the net proceeds of the IPO will be retained by uBid.
2.3. CONDITIONS PRECEDENT TO CONSUMMATION OF THE IPO. As soon as
practicable after the date of this Agreement, the parties hereto shall use their
reasonable best efforts to satisfy the following conditions to the consummation
of the IPO. The obligations of the parties to consummate the IPO shall be
conditioned on the satisfaction, or waiver by CCI, of the following conditions:
(a) The IPO Registration Statement shall have been filed and declared
effective by the Commission, and there shall be no stop order in effect with
respect thereto.
(b) The actions and filings with regard to state securities and blue
sky laws of the United States (and any comparable laws under any foreign
jurisdictions) described in Section 2.1 shall have been taken and, where
applicable, have become effective or been accepted.
(c) The uBid Common Stock to be issued in the IPO shall have been
accepted for listing on the NASDAQ Stock Market, on official notice of issuance.
(d) uBid shall have entered into the Underwriting Agreement and all
conditions to the obligations of uBid and the Underwriters shall have been
satisfied or waived.
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(e) CCI shall be satisfied in its sole discretion that it will own at
least 80.1% of the voting rights attached to the outstanding uBid Common Stock
following the IPO, and all other conditions to permit the Distribution to
qualify as a tax-free distribution to CCI's stockholders and CCI shall, to the
extent applicable as of the time of the IPO, be satisfied and there shall be no
event or condition that is likely to cause any of such conditions not to be
satisfied as of the time of the Distribution or thereafter.
(f) No order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the IPO or any of the other transactions contemplated by this
Agreement or any Ancillary Agreement shall be in effect.
(g) Such other actions as the parties hereto may, based upon the advice
of counsel, reasonably request to be taken prior to the IPO in order to assure
the successful completion of the IPO and the other transactions contemplated by
this Agreement shall have been taken.
(h) This Agreement shall not have been terminated.
ARTICLE III
THE DISTRIBUTION
3.1. THE DISTRIBUTION. (a) Subject to Section 3.3 hereof, on or prior to
the Distribution Date, CCI will deliver to the Agent for the benefit of holders
of record of CCI Common Stock on the Record Date, a single stock certificate,
endorsed by CCI in blank, representing all of the outstanding shares of uBid
Common Stock then owned by CCI, and shall cause the transfer agent for the
shares of CCI Common Stock to instruct the Agent to distribute on the
Distribution Date the appropriate number of such shares of uBid Common Stock to
each such holder or designated transferee or transferees of such holder.
(b) Subject to Section 3.4, each holder of CCI Common Stock on the
Record Date (or such holder's designated transferee or transferees) will be
entitled to receive in the Distribution a number of shares of uBid Common Stock
equal to the number of shares of CCI Common Stock held by such holder on the
Record Date multiplied by a fraction the numerator of which is the number of
shares of uBid Common Stock beneficially owned by CCI, on the Record Date and
the denominator of which is the number of shares of CCI Common Stock outstanding
on the Record Date.
(c) uBid and CCI, as the case may be, will provide to the Agent all
share certificates and any information required in order to complete the
Distribution on the basis specified above.
3.2. ACTIONS PRIOR TO THE DISTRIBUTION. (a) CCI and uBid shall prepare and
mail, prior to the Distribution Date, to the holders of CCI Common Stock, such
information concerning uBid, its business, operations and management, the
Distribution and such other matters as CCI shall reasonably determine and as may
be required by law. CCI and uBid will prepare, and uBid will, to the extent
required under applicable law, file with the Commission any
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such documentation and any requisite no action letters which CCI determines are
necessary or desirable to effectuate the Distribution and CCI and uBid shall
each use its reasonable best efforts to obtain all necessary approvals from the
Commission with respect thereto as soon as practicable.
(b) CCI and uBid shall take all such action as may be necessary or
appropriate under the securities or blue sky laws of the United States (and any
comparable laws under any foreign jurisdiction) in connection with the
Distribution.
(c) CCI and uBid shall take all reasonable steps necessary and
appropriate to cause the conditions set forth in Section 3.3 (subject to
Sections 3.3(d)) to be satisfied and to effect the Distribution on the
Distribution Date.
(d) uBid shall prepare and file, and shall use its reasonable best
efforts to have approved, an application for the listing on the NASDAQ Stock
Market, subject to official notice of distribution of the uBid Common Stock to
be distributed in the Distribution, and the share of uBid Common stock covered
by uBid Options to be granted under Section 3.6 below.
3.3. CONDITIONS TO DISTRIBUTION. The CCI Board currently intends to effect
the Distribution at any time commencing 180 days after the Closing Date and
ending on or prior to December 31, 1999. Subject to any restrictions contained
in the Underwriting Agreement, the CCI Board shall have the sole discretion to
determine the date of consummation of the Distribution at any time commencing
180 days after the Closing Date and ending on or prior to December 31, 1999. CCI
shall be obligated to consummate the Distribution on or before December 31,
1999, subject to the satisfaction, or waiver by the CCI Board in its sole
discretion, of the conditions set forth below. In the event that any such
condition shall not have been satisfied or waived on or before December 31,
1999, CCI shall consummate the Distribution as promptly as practicable following
the satisfaction or waiver by CCI of all such conditions.
(a) an opinion letter from PricewaterhouseCoopers LLP (the "PWC
Opinion") shall have been obtained in form and substance satisfactory to CCI in
its sole discretion, and shall be confirmed at the Distribution Date, to the
effect that, among other things, the Distribution will qualify as a tax-free
distribution for federal income tax purposes under Section 355 of the Code and
the Distribution by CCI of the uBid Common Stock to stockholders of CCI will not
result in recognition of any income, gain or loss for federal income tax
purposes to CCI or CCI's stockholders;
(b) if CCI, in its sole discretion, decides to seek a private letter
ruling from the Internal Revenue Service to the same effect as the PWC Opinion
(the "Letter Ruling"), the Letter Ruling shall have been obtained in form and
substance satisfactory to CCI, and shall continue in effect, consistent with the
conclusions reached in the PWC Opinion.
(c) any material Governmental Approvals and Consents necessary to
consummate the Distribution shall have been obtained and be in full force and
effect;
(d) no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the
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Distribution shall be in effect and no other event outside the control of CCI
shall have occurred or failed to occur that prevents the consummation of the
Distribution; and
(e) no other events or developments shall have occurred subsequent to
the Closing Date that, in the sole judgment of the Board of Directors of CCI,
would result in the Distribution having a material adverse effect on CCI or on
the stockholders of CCI.
The foregoing conditions are for the sole benefit of CCI and shall not give
rise to or create any duty on the part of CCI or the CCI Board of Directors to
waive or not waive any such condition.
3.4. FRACTIONAL SHARES. As soon as practicable after the Distribution Date,
CCI shall direct the Agent to determine the number of whole shares and
fractional shares of uBid Common Stock allocable to each holder of record or
beneficial owner of CCI Common Stock as of the Record Date, to aggregate all
such fractional shares and sell the whole shares obtained thereby at the
direction of CCI either to CCI, in open market transactions or otherwise, in
each case at then prevailing trading prices, and to cause to be distributed to
each such holder or for the benefit of each such beneficial owner to which a
fractional share shall be allocable such holder's or owner's ratable share of
the proceeds of such sale, after making appropriate deductions of the amount
required to be withheld for federal income tax purposes and after deducting an
amount equal to all brokerage charges, commissions and transfer taxes attributed
to such sale. CCI and the Agent shall use their reasonable best efforts to
aggregate the shares of CCI Common Stock that may be held by any beneficial
owner thereof through more than one account in determining the fractional share
allocable to such beneficial owner.
3.5. THE uBID BOARD OF DIRECTORS. CCI and uBid shall each take all actions
which may be required to elect or otherwise appoint as directors of uBid, on or
prior to the Distribution Date, such individuals as may be designated by uBid's
Board of Directors (which designation shall be approved by the majority of
uBid's directors who are at such time neither officers nor directors of CCI) as
additional or substitute members of the Board of Directors of uBid on the
Distribution Date.
3.6. ADJUSTMENT OF CCI STOCK OPTIONS. As of the Distribution Date, each
outstanding option to purchase CCI Common Stock (each a "CCI Option") shall be
adjusted as set forth in this Section 3.6 ("Adjusted Option"). Each Adjusted
Option shall be converted, as of the Distribution Date, into two options: an
option (the "CCI Adjusted Option") to purchase the same number of shares of CCI
Common Stock covered by the Adjusted Option and as to which the option has not
been exercised as of the Distribution Date ("CCI Option Number") and an option
(the "uBid Option") to purchase a number of shares of uBid Common Stock equal
to the CCI Option Number times a fraction, the numerator of which is the total
number of shares of uBid Common Stock distributed to CCI stockholders in the
Distribution and the denominator of which is the total number of shares of CCI
Common Stock outstanding on the record date for the Distribution (the
"Distribution Ratio"). The exercise price for the CCI Option and the uBid
Option shall, collectively, equal the exercise price of the applicable Adjusted
Option immediately prior to the Distribution ("Original Exercise Price") and
shall be allocated between the CCI Adjusted Option and the uBid Option based
upon the respective average post-Distribution closing prices of CCI Common Stock
and uBid Common Stock on the Nasdaq
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National Market for the 30 [trading] days following the ex-dividend date for the
Distribution ("Adjustment Period"). The exercise price for each CCI Adjusted
Option shall equal the Original Exercise Price times the CCI Percentage (as
defined below (rounded to the nearest cent) and the exercise price for each uBid
Option granted with respect to a CCI Option shall equal the Original Exercise
Price of such CCI Option times the uBid Percentage (as defined below) rounded to
A
the nearest cent. For this purpose the CCI Percentage shall equal -------,
A+B(C)
where "A" equals the average closing price of CCI Common Stock on the Nasdaq
National Market for the Adjustment Period, "B" equals the average closing price
of uBid Common Stock on the Nasdaq National Market for the Adjustment Period and
"C" equals the Distribution Ratio. The uBid Percentage shall equal 100% minus
the CCI Percentage.
The uBid Options to be granted with respect to each Adjusted Option
shall be issued under uBid's 1998 Stock Incentive Plan, and uBid shall take all
corporate action and make all required filings under applicable state Blue Sky
laws and the Securities Act to (i) issue the uBid Options required under this
Section 3.6 and (ii) to register or qualify the uBid Options and/or the
underlying shares of uBid Common Stock so that the shares of uBid Common Stock
acquired upon exercise of each uBid Option are freely tradable under the
Securities Act (except for shares acquired by Affiliates of uBid) and each
applicable state's Blue Sky laws.
ARTICLE IV
ANCILLARY AGREEMENTS, REGISTRATION RIGHTS AGREEMENTS AND
TAX INDEMNIFICATION AND ALLOCATION AGREEMENT
4.1. ANCILLARY AGREEMENTS. Prior to the date hereof, CCI has provided to
uBid the following services: administration (accounting, human resources,
legal), warehousing and distribution, Internet/telecom, and joint marketing.
uBid and CCI will enter into the Ancillary Agreements pursuant to which CCI will
provide certain of such services to uBid on a transitional basis as described in
the Ancillary Agreements. Effective as of the date hereof, each of CCI and uBid
will execute and deliver all of the Ancillary Agreements, the Registration
Rights Agreements and the Tax Indemnification and Allocation Agreement.
ARTICLE V
INDEMNIFICATION
5.1. RELEASE OF PRE-CLOSING CLAIMS. (a) Except as provided in Section
5.1(c), effective as of the Closing Date, uBid does hereby, for itself, its
respective Affiliates (other than any member of the CCI Group), successors and
assigns, and all Persons who at any time prior to the Closing Date have been
stockholders, directors, officers, agents or employees of any member of the uBid
Group (in each case, in their respective capacities as such), remise, release
and forever discharge each of CCI, its respective Affiliates (other than any
member of the uBid Group), successors and assigns, and all Persons who at any
time prior to the Closing Date have been stockholders, directors, officers,
agents or employees of CCI (in each case, in their respective capacities as
such), and their respective heirs, executors, administrators, successors
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and assigns, from any and all Liabilities whatsoever, whether at law or in
equity (including any right of contribution), whether arising under any contract
or agreement, by operation of law or otherwise, existing or arising from all
acts and events occurring or failing to occur or alleged to have occurred or to
have failed to occur and all conditions existing or alleged to have existed on
or before the Closing Date, including in connection with the transactions and
all other activities to implement the IPO or the Distribution, between uBid and
CCI (including any contractual arrangements or arrangements existing or alleged
to exist between them on or before the Closing Date).
(b) Except as provided in Section 5.1(c), effective as of the Closing
Date, CCI does hereby, for itself and its Affiliates (other than any member of
the uBid Group), successors and assigns, and all Persons who at any time prior
to the Closing Date have been stockholders, directors, officers, agents or
employees of any member of the CCI Group (in each case, in their respective
capacities as such), remise, release and forever discharge uBid, the respective
members of the uBid Group, their respective Affiliates (other than any member of
the CCI Group), successors and assigns, and all Persons who at any time prior to
the Closing Date have been stockholders, directors, officers, agents or
employees of any member of the uBid Group (in each case, in their respective
capacities as such), and their respective heirs, executors, administrators,
successors and assigns, from any and all Liabilities whatsoever, whether at law
or in equity (including any right of contribution), whether arising under any
contract or agreement, by operation of law or otherwise, existing or arising
from all acts and events occurring or failing to occur or alleged to have
occurred or to have failed to occur and all conditions existing or alleged to
have existed on or before the Closing Date, including in connection with the
transactions and all other activities to implement the IPO or the Distribution,
between uBid and CCI (including any contractual arrangements or arrangements
existing or alleged to exist between them on or before the Closing Date).
(c) Nothing contained in Section 5.1(a) or (b) shall impair any right
of any Person to enforce this Agreement, any Ancillary Agreement, the
Registration Rights Agreements or the Tax Indemnification and Allocation
Agreement. Nothing contained in Section 5.1(a) or (b) shall release any Person
from:
(i) any Liability, contingent or otherwise, assumed,
transferred, assigned or allocated to the Group of which such Person is
a member in accordance with, or any other Liability of any member of
any Group under, this Agreement or any Ancillary Agreement;
(ii) any Liability for the sale, lease, construction or receipt
of goods, property or services purchased, obtained or used in the
ordinary course of business by a member of one Group from a member of
any other Group prior to the Closing Date;
(iii) any Liability for unpaid amounts for products or services or
refunds owing on products or services due on a value-received basis for
work done by a member of one Group at the request or on behalf of a
member of another Group;
(iv) any Liability that the parties may have with respect to
indemnification or contribution pursuant to this Agreement for claims
brought against the
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parties by third Persons, which Liability shall be governed by the
provisions of this Article V and Article VI and, if applicable, the
appropriate provisions of the Ancillary Agreements; or
(v) in the case of uBid, outstanding unpaid amounts as of the
Closing Date advanced to uBid for working capital and fixed asset
purchases, which amounts will be repaid in full not later than 18
months following the Closing Date, with interest thereon payable
monthly.
(vi) any Liability the release of which would result in the
release of any Person other than a Person released pursuant to this
Section 5.1; provided that the parties agree not to bring suit or
permit any of their Subsidiaries to bring suit against any Person with
respect to any Liability to the extent that such Person would be
released with respect to such Liability by this Section 5.1 but for the
provisions of this clause (vi).
(d) uBid shall not make, and shall not permit any member of the uBid
Group to make, any claim or demand, or commence any Action asserting any claim
or demand, including any claim of contribution or any indemnification, against
CCI or any member of the CCI Group or any other Person released pursuant to
Section 5.1(a), with respect to any Liabilities released pursuant to Section
5.1(a). CCI shall not, and shall not permit any member of the CCI Group, to make
any claim or demand, or commence any Action asserting any claim or demand,
including any claim of contribution or any indemnification, against uBid or any
member of the uBid Group, or any other Person released pursuant to Section
5.1(b), with respect to any Liabilities released pursuant to Section 5.1(b).
(e) It is the intent of each of CCI and uBid by virtue of the provisions
of this Section 5.1 to provide for a full and complete release and discharge of
all Liabilities existing or arising from all acts and events occurring or
failing to occur or alleged to have occurred or to have failed to occur and all
conditions existing or alleged to have existed on or before the Closing Date,
between or among uBid or any member of the uBid Group, on the one hand, and CCI
or any member of the CCI Group, on the other hand (including any contractual
agreements or arrangements existing or alleged to exist between or among any
such members on or before the Closing Date), except as expressly set forth in
Section 5.1(c). At any time, at the request of any other party, each party shall
cause each member of its respective Group to execute and deliver releases
reflecting the provisions hereof.
5.2. INDEMNIFICATION BY uBID. Except as provided in Section 5.4, uBid shall
indemnify, defend and hold harmless CCI, each member of the CCI Group and each
of their respective directors, officers and employees, and each of the heirs,
executors, successors and assigns of any of the foregoing (collectively, the
"CCI Indemnitees"), from and against any and all Liabilities of the CCI
Indemnitees relating to, arising out of or resulting from any of the following
items (without duplication):
(a) the failure of uBid or any other member of the uBid Group or any
other Person to pay, perform or otherwise promptly discharge any liabilities of
uBid in accordance with their respective terms, whether prior to or after the
Closing Date or the date hereof;
(b) any breach by uBid or any member of the uBid Group of this
Agreement, any of the Ancillary Agreements, the Registration Rights Agreements
or the Tax Indemnification and Allocation Agreement
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(c) any untrue statement or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, with
respect to all information contained in any IPO Registration Statement or
Prospectus.
5.3. INDEMNIFICATION BY CCI. (a) Except as otherwise provided in Section
5.4, CCI shall indemnify, defend and hold harmless uBid, each member of the uBid
Group and each of their respective directors, officers and employees, and each
of the heirs, executors, successors and assigns of any of the foregoing
(collectively, the "uBid Indemnitees"), from and against any and all Liabilities
of the uBid Indemnitees relating to, arising out of or resulting from any of the
following items (without duplication):
(i) the failure of CCI or any other member of the CCI Group or
any other Person to pay, perform or otherwise promptly discharge any
Liabilities of the CCI Group, whether prior to or after the Closing Date or
the date hereof; and
(ii) any breach by CCI or any member of the CCI Group of this
Agreement, any of the Ancillary Agreements or the Registration Rights
Agreements.
5.4. INDEMNIFICATION OBLIGATIONS NET OF INSURANCE PROCEEDS AND OTHER
AMOUNTS. (a) The parties intend that any Liability subject to indemnification or
reimbursement pursuant to this Article V or Article VI will be net of Insurance
Proceeds that actually reduce the amount of the Liability. Accordingly, the
amount which any party (an "Indemnifying Party") is required to pay to any
Person entitled to indemnification hereunder (an "Indemnitee") will be reduced
by any Insurance Proceeds theretofore actually recovered by or on behalf of the
Indemnitee in reduction of the related Liability. If an Indemnitee receives a
payment (an "Indemnity Payment") required by this Agreement from an Indemnifying
Party in respect of any Liability and subsequently receives Insurance Proceeds,
then the Indemnitee will pay to the Indemnifying Party an amount equal to the
excess of the Indemnity Payment received over the amount of the Indemnity
Payment that would have been due if the Insurance Proceeds had been received,
realized or recovered before the Indemnity Payment was made.
(b) An insurer who would otherwise be obligated to pay any claim shall
not be relieved of the responsibility with respect thereto or, solely by virtue
of the indemnification provisions hereof, have any subrogation rights with
respect thereto, it being expressly understood and agreed that no insurer or any
other third party shall be entitled to a "windfall" (i.e., a benefit they would
not be entitled to receive in the absence of the indemnification provisions) by
virtue of the indemnification provisions hereof. Nothing contained in this
Agreement, any Ancillary Agreement or the Registration Rights Agreements shall
obligate any member of any Group to seek to collect or recover any Insurance
Proceeds.
5.5. PROCEDURES FOR INDEMNIFICATION OF THIRD PARTY CLAIMS. (a) If an
Indemnitee shall receive notice or otherwise learn of the assertion by a Person
(including any Governmental Authority) who is not a member of the CCI Group or
the uBid Group of any claim or of the commencement by any such Person of any
Action (collectively, a "Third Party Claim") with respect to which an
Indemnifying Party may be obligated to provide indemnification to such
Indemnitee pursuant to Section 5.2 or 5.3, or any other Section of this
Agreement, any Ancillary
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Agreement or the Registration Rights Agreements, such Indemnitee shall give such
Indemnifying Party written notice thereof within 20 days after becoming aware of
such Third Party Claim. Any such notice shall describe the Third Party Claim in
reasonable detail. Notwithstanding the foregoing, the failure of any Indemnitee
or other Person to give notice as provided in this Section 5.5(a) shall not
relieve the related Indemnifying Party of its obligations under this Article V,
except to the extent that such Indemnifying Party is actually prejudiced by such
failure to give notice.
(b) An Indemnifying Party may elect to defend (and, unless the
Indemnifying Party has specified any reservations or exceptions, to seek to
settle or compromise), at such Indemnifying Party's own expense and by such
Indemnifying Party's own counsel, any Third Party Claim. Within 30 days after
the receipt of notice from an Indemnitee in accordance with Section 5.5(a) (or
sooner, if the nature of such Third Party Claim so requires), the Indemnifying
Party shall notify the Indemnitee of its election whether the Indemnifying Party
will assume responsibility for defending such Third Party Claim, which election
shall specify any reservations or exceptions. After notice from an Indemnifying
Party to an Indemnitee of its election to assume the defense of a Third Party
Claim, such Indemnitee shall have the right to employ separate counsel and to
participate in (but not control) the defense, compromise, or settlement thereof,
but the fees and expenses of such counsel shall be the expense of such
Indemnitee except as set forth in the next sentence. In the event that the
Indemnifying Party has elected to assume the defense of the Third Party Claim
but has specified, and continues to assert, any reservations or exceptions in
such notice, then, in any such case, the reasonable fees and expenses of one
separate counsel for all Indemnitees shall be borne by the Indemnifying Party.
(c) If an Indemnifying Party elects not to assume responsibility for
defending a Third Party Claim, or fails to notify an Indemnitee of its election
as provided in Section 5.5(d), such Indemnitee may defend such Third Party Claim
at the cost and expense of the Indemnifying Party.
(d) Unless the Indemnifying Party has failed to assume the defense of
the Third Party Claim in accordance with the terms of this Agreement, no
Indemnitee may settle or compromise any Third Party Claim without the consent of
the Indemnifying Party.
(e) No Indemnifying Party shall consent to entry of any judgment or
enter into any settlement of the Third Party Claim without the consent of the
Indemnitee if the effect thereof is to permit any injunction, declaratory
judgment, other order or other nonmonetary relief to be entered, directly or
indirectly, against any Indemnitee.
(f) The provisions of Section 5.5 and Section 5.6 shall not apply to
Taxes (which are covered by the Tax Indemnification and Allocation Agreement).
5.6. ADDITIONAL MATTERS. (a) Any claim on account of a Liability which does
not result from a Third Party Claim shall be asserted by written notice given by
the Indemnitee to the related Indemnifying Party. Such Indemnifying Party shall
have a period of 30 days after the receipt of such notice within which to
respond thereto. If such Indemnifying Party does not respond within such 30-day
period, such Indemnifying Party shall be deemed to have refused to accept
responsibility to make payment. If such Indemnifying Party does not respond
within such
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30-day period or rejects such claim in whole or in part, such Indemnitee shall
be free to pursue such remedies as may be available to such party as
contemplated by this Agreement, the Ancillary Agreements and the Registration
Rights Agreements.
(b) In the event of payment by or on behalf of any Indemnifying Party
to any Indemnitee in connection with any Third Party Claim, such Indemnifying
Party shall be subrogated to and shall stand in the place of such Indemnitee as
to any events or circumstances in respect of which such Indemnitee may have any
right, defense or claim relating to such Third Party Claim against any claimant
or plaintiff asserting such Third Party Claim or against any other person. Such
Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner,
and at the cost and expense (including allocated costs of in-house counsel and
other personnel) of such Indemnifying Party, in prosecuting any subrogated
right, defense or claim.
(c) In the event of an Action in which the Indemnifying Party is not a
named defendant, if the Indemnifying Party shall so request, the parties shall
endeavor to substitute the Indemnifying Party for the named defendant if at all
practicable. If such substitution or addition cannot be achieved for any reason
or is not requested, the named defendant shall allow the Indemnifying Party to
manage the Action as set forth in this Section and the Indemnifying Party shall
fully indemnify the named defendant against all costs of defending the Action
(including court costs, sanctions imposed by a court, attorneys' fees, experts'
fees and all other external expenses), the costs of any judgment or settlement,
and the cost of any interest or penalties relating to any judgment or
settlement.
5.7. REMEDIES CUMULATIVE. The remedies provided in this Article V shall be
cumulative and, subject to the provisions of Article VIII, shall not preclude
assertion by any Indemnitee of any other rights or the seeking of any and all
other remedies against any Indemnifying Party.
5.8. SURVIVAL OF INDEMNITIES. The rights and obligations of each of CCI and
uBid and their respective Indemnitees under this Article V shall survive the
sale or other transfer by any party of any Assets or businesses or the
assignment by it of any Liabilities.
ARTICLE VI
INTERIM OPERATIONS AND CERTAIN OTHER MATTERS
6.1. INSURANCE MATTERS. (a) uBid agrees that it will pay to CCI $_____ per
month (prorated on a daily basis for any partial month) in respect of the period
from the date hereof until the Distribution Date, such amount to be payable in
arrears by the 10th day of the next succeeding month, in respect of Insurance
Policies under which uBid will continue to have coverage following the date
hereof. CCI and uBid agree to cooperate in good faith to provide for an orderly
transition of insurance coverage from the date hereof through the Distribution
Date and for the treatment of any Insurance Policies that will remain in effect
following the Closing Date on a mutually agreeable basis. In no event shall CCI,
any other member of the CCI Group or any CCI Indemnitee have liability or
obligation whatsoever to any member of the uBid Group in the event that any
Insurance Policy or other contract or policy of insurance shall be terminated or
otherwise cease to be in effect for any reason, shall be unavailable or
inadequate to cover any
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Liability of any member of the uBid Group for any reason whatsoever or shall not
be renewed or extended beyond the current expiration date.
(b) (i) Except as otherwise provided in any Ancillary Agreement, the
parties intend by this Agreement that uBid and each other member of the uBid
Group be successors-in-interest to all rights that any member of the uBid Group
may have as of the Closing Date as a subsidiary, affiliate, division or
department of CCI prior to the Closing Date under any policy of insurance issued
to CCI by any insurance carrier unaffiliated with CCI or under any agreements
related to such policies executed and delivered prior to the Closing Date,
including any rights such member of the uBid Group may have, as an insured or
additional named insured, subsidiary, affiliate, division or department, to
avail itself of any such policy of insurance or any such agreements related to
such policies as in effect prior to the Closing Date. At the request of uBid,
CCI shall take all reasonable steps, including the execution and delivery of any
instruments, to effect the foregoing; provided however that CCI shall not be
required to pay any amounts, waive any rights or incur any Liabilities in
connection therewith.
(ii) Except as otherwise contemplated by any Ancillary Agreement,
after the Closing Date, none of CCI or uBid or any member of their respective
Groups shall, without the consent of the other, provide any such insurance
carrier with a release, or amend, modify or waive any rights under any such
policy or agreement, if such release, amendment, modification or waiver would
adversely affect any rights or potential rights of any member of the other Group
thereunder; provided however that the foregoing shall not (A) preclude any
member of any Group from presenting any claim or from exhausting any policy
limit, (B) require any member of any Group to pay any premium or other amount or
to incur any Liability, or (C) require any member of any Group to renew, extend
or continue any policy in force. Each of uBid and CCI will share such
information as is reasonably necessary in order to permit the other to manage
and conduct its insurance matters in an orderly fashion.
(c) This Agreement shall not be considered as an attempted assignment
of any policy of insurance or as a contract of insurance and shall not be
construed to waive any right or remedy of any member of the CCI Group in respect
of any Insurance Policy or any other contract or policy of insurance.
(d) uBid does hereby, for itself and each other member of the uBid
Group, agree that no member of the CCI Group or any CCI Indemnitee shall have
any Liability whatsoever as a result of the insurance policies and practices of
CCI and its Affiliates as in effect at any time prior to the Closing Date,
including as a result of the level or scope of any such insurance, the
creditworthiness of any insurance carrier, the terms and conditions of any
policy, the adequacy or timeliness of any notice to any insurance carrier with
respect to any claim or potential claim or otherwise.
(e) Nothing in this Agreement shall be deemed to restrict any member of
the uBid Group from acquiring at its own expense any other insurance policy in
respect of any Liabilities or covering any period.
6.2. CERTAIN BUSINESS MATTERS. (a) Except as may be expressly set forth in
Section 6.3 below or in any Ancillary Agreement, no member of any Group shall
have any duty
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to refrain from (i) engaging in the same or similar activities or lines of
business as any member of any other Group, (ii) doing business with any
potential or actual supplier or customer of any member of any other Group, or
(iii) engaging in, or refraining from, any other activities whatsoever relating
to any of the potential or actual suppliers or customers of any member of any
other Group.
(b) Each of CCI and uBid is aware that from time to time certain
business opportunities may arise which more than one Group may be financially
able to undertake, and which are, from their nature, in the line of more than
one Group's business and are of practical advantage to more than one Group. In
connection therewith, the parties agree that if, following the Closing Date and
prior to (but not following) the Distribution Date, any of CCI or uBid acquires
knowledge of an opportunity that meets the foregoing standard with respect to
more than one Group, none of CCI or uBid shall have any duty to communicate or
offer such opportunity to any of the others and may pursue or acquire such
opportunity for itself, or direct such opportunity to any other Person.
6.3. NON-COMPETITION.
(a) CCI acknowledges that as the Parent of uBid it has become privy to
certain confidential information and trade secrets of uBid and further
acknowledges that it will derive substantial benefits from the consummation of
the transactions contemplated by this Agreement and that purchasers of Common
Stock of uBid in the IPO will be making substantial investments in reliance upon
the agreement contained in this Section 6.3 that the knowledge and expertise
developed by uBid and available to CCI will be preserved and will not be used in
competition with uBid. CCI hereby agrees that it is reasonable and necessary for
the protection of uBid that it agree, and accordingly CCI hereby does agree
that, for a period of nine months from the Distribution Date (the
"Noncompetition Period"), CCI will not directly or indirectly engage in the
Internet online auction business in substantially the same manner and format as
conducted by uBid on the date hereof (the "uBid Business") or become a
stockholder, partner or owner of any other person, corporation, firm or business
that is engaged in the uBid Business.
(b) The invalidity or non-enforceability of this Section 6.3 in any
respect shall not affect the validity or enforceability of this Section 6.3 in
any other respect or of any other provisions of this Agreement. In the event
that any provision of this Section 6.3 shall be held invalid or unenforceable by
a court of competent jurisdiction by reason of the geographic or business scope
or the duration thereof, such invalidity or unenforceability shall attach only
to the scope or duration of such provision and shall not affect or render
invalid or unenforceable any other provision of this Agreement, and, to the
fullest extent permitted by law, this Agreement shall be construed as if the
geographic or business scope or the duration of such provision had been more
narrowly drafted so as not to be invalid or unenforceable.
(c) CCI acknowledges that the Company would suffer irreparable harm if
CCI were to breach the provisions of this Section 6.3 and that the Company's
remedy at law for any such breach is and will be insufficient and inadequate and
that the Company shall be entitled to equitable relief, including by way of
temporary and permanent injunction, in addition to any remedies the Company may
have at law.
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6.4. LATE PAYMENTS. Except as expressly provided to the contrary in this
Agreement or in any Ancillary Agreement, any amount not paid when due pursuant
to this Agreement or any Ancillary Agreement, the Registration Rights Agreements
or the Tax Indemnification and Allocation Agreement (and any amounts billed or
otherwise invoiced or demanded and properly payable that are not paid within 30
days of such bill, invoice or other demand) shall accrue interest at a rate per
annum equal to the Prime Rate plus 2%.
ARTICLE VII
EXCHANGE OF INFORMATION; CONFIDENTIALITY
7.1. AGREEMENT FOR EXCHANGE OF INFORMATION; ARCHIVES. (a) Each of CCI and
uBid, on behalf of its respective Group, agrees to provide, or cause to be
provided, to the other Group, at any time before or after the Distribution Date,
as soon as reasonably practicable after written request therefor, any
Information in the possession or under the control of such Group which the
requesting party reasonably needs (i) to comply with reporting, disclosure,
filing or other requirements imposed on the requesting party (including under
applicable securities or tax laws) by a Governmental Authority having
jurisdiction over the requesting party, (ii) for use in any other judicial,
regulatory, administrative, tax or other proceeding or in order to satisfy
audit, accounting, claims, regulatory, litigation, tax or other similar
requirements, or (iii) to comply with its obligations under this Agreement or
any Ancillary Agreement; provided, however, that in the event that any party
determines that any such provision of Information could be commercially
detrimental, violate any law or agreement, or waive any attorney client
privilege, the parties shall take all reasonable measures to permit the
compliance with such obligations in a manner that avoids any such harm or
consequence.
(b) After the Closing Date, uBid shall have access during regular
business hours (as in effect from time to time) to the documents and objects of
historic significance that relate to the business of uBid that are located in
the CCI Records. uBid may obtain copies (but not originals) of documents for
bona fide business purposes and may obtain objects for exhibition purposes for
commercially reasonable periods of time if required for bona fide business
purposes, provided that uBid shall cause any such objects to be returned
promptly in the same condition in which they were delivered to uBid and uBid
shall comply with any rules, procedures or other requirements, and shall be
subject to any restrictions (including prohibitions on removal of specified
objects), that are then applicable to CCI. Nothing herein shall be deemed to
restrict the access of any member of the CCI Group to any such documents or
objects or to impose any liability on any member of the CCI Group if any such
documents or objects are not maintained or preserved by CCI.
(c) After the date hereof, (i) uBid shall maintain in effect at its
own cost and expense adequate systems and controls to the extent necessary to
enable the members of the CCI Group to satisfy their respective reporting,
accounting, audit and other obligations, and (ii) uBid shall provide, or cause
to be provided, to CCI in such form as CCI shall request, at no charge to CCI,
all financial and other data and information as CCI determines necessary or
advisable in order to prepare CCI financial statements and reports or filings
with any Governmental Authority.
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7.2. OWNERSHIP OF INFORMATION. Any Information owned by one Group that is
provided to a requesting party pursuant to Section 7.1 shall be deemed to remain
the property of the providing party. Unless specifically set forth herein,
nothing contained in this Agreement shall be construed as granting or conferring
rights of license or otherwise in any such Information.
7.3. COMPENSATION FOR PROVIDING INFORMATION. The party requesting such
Information agrees to reimburse the other party for the reasonable costs, if
any, of creating, gathering and copying such Information, to the extent that
such costs are incurred for the benefit of the requesting party. Except as may
be otherwise specifically provided elsewhere in this Agreement or in any other
agreement between the parties, such costs shall be computed in accordance with
the providing party's standard methodology and procedures.
7.4. RECORD RETENTION. To facilitate the possible exchange of Information
pursuant to this Article VII and other provisions of this Agreement after the
Distribution Date, the parties agree to use their reasonable best efforts to
retain all Information in their respective possession or control on the
Distribution Date in accordance with the policies of CCI as in effect on the
Closing Date. No party will destroy, or permit any of its Subsidiaries to
destroy, any Information which the other party may have the right to obtain
pursuant to this Agreement prior to the third anniversary of the date hereof
without first using its reasonable best efforts to notify the other party of the
proposed destruction and giving the other party the opportunity to take
possession of such information prior to such destruction; provided, however,
that in the case of any Information relating to Taxes or to Environmental
Liabilities, such period shall be extended to the expiration of the applicable
statute of limitations (giving effect to any extensions thereof).
7.5. LIMITATION OF LIABILITY. No party shall have any liability to any
other party in the event that any Information exchanged or provided pursuant to
this Agreement which is an estimate or forecast, or which is based on an
estimate or forecast, is found to be inaccurate, in the absence of willful
misconduct by the party providing such Information. No party shall have any
liability to any other party if any Information is destroyed after reasonable
best efforts by such party to comply with the provisions of Section 7.4.
7.6. OTHER AGREEMENTS PROVIDING FOR EXCHANGE OF INFORMATION. The rights
and obligations granted under this Article VI are subject to any specific
limitations, qualifications or additional provisions on the sharing, exchange or
confidential treatment of Information set forth in any Ancillary Agreement.
7.7. PRODUCTION OF WITNESSES; RECORDS; COOPERATION. (a) After the Closing
Date, except in the case of an adversarial Action by one party against another
party, each party hereto shall use its reasonable best efforts to make available
to each other party, upon written request, the former, current and future
directors, officers, employees, other personnel and agents of the members of its
respective Group as witnesses and any books, records or other documents within
its control or which it otherwise has the ability to make available, to the
extent that any such person (giving consideration to business demands of such
directors, officers, employees, other personnel and agents) or books, records or
other documents may reasonably be required in connection with any Action in
which the requesting party may from time to time be involved, regardless of
whether such Action is a matter with respect to which indemnification
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may be sought hereunder. The requesting party shall bear all costs and expenses
in connection therewith.
(b) If an Indemnifying Party chooses to defend or to seek to
compromise or settle any Third Party Claim, the other parties shall make
available to such Indemnifying Party or such other party, as the case may be,
upon written request, the former, current and future directors, officers,
employees, other personnel and agents of the members of its respective Group as
witnesses and any books, records or other documents within its control or which
it otherwise has the ability to make available, to the extent that any such
person (giving consideration to business demands of such directors, officers,
employees, other personnel and agents) or books, records or other documents may
reasonably be required in connection with such defense, settlement or
compromise, or such prosecution, evaluation or pursuit, as the case may be, and
shall otherwise cooperate in such defense, settlement or compromise, or such
prosecution, evaluation or pursuit, as the case may be.
(c) Without limiting the foregoing, the parties shall cooperate and
consult to the extent reasonably necessary with respect to any Actions.
(d) Without limiting any provision of this Section, each of the
parties agrees to cooperate, and to cause each member of its respective Group to
cooperate, with each other in the defense of any infringement or similar claim
with respect to any intellectual property and shall not claim to acknowledge, or
permit any member of its respective Group to claim to acknowledge, the validity
or infringing use of any intellectual property of a third Person in a manner
that would hamper or undermine the defense of such infringement or similar
claim.
(e) The obligation of the parties to provide witnesses pursuant to
this Section 7.7 is intended to be interpreted in a manner so as to facilitate
cooperation and shall include the obligation to provide as witnesses inventors
and other officers without regard to whether the witness or the employer of the
witness could assert a possible business conflict (subject to the exception set
forth in the first sentence of Section 7.7(a)).
(f) In connection with any matter contemplated by this Section 7.7,
the parties will enter into a mutually acceptable joint defense agreement so as
to maintain to the extent practicable any applicable attorney-client privilege
or work product immunity of any member of any Group.
7.8. CONFIDENTIALITY. (a) Subject to Section 7.9, each of CCI and uBid, on
behalf of itself and each member of its respective Group, agrees to hold, and to
cause its respective directors, officers, employees, agents, accountants,
counsel and other advisors and representatives to hold, in strict confidence,
with at least the same degree of care that applies to CCI's confidential and
proprietary information pursuant to policies in effect as of the Closing Date,
all Information concerning each such other Group that is either in its
possession (including Information in its possession prior to any of the date
hereof, the Closing Date or the Distribution Date) or furnished by any such
other Group or its respective directors, officers, employees, agents,
accountants, counsel and other advisors and representatives at any time pursuant
to this Agreement, any Ancillary Agreement, the Registration Rights Agreements,
the Tax Indemnification and Allocation Agreement or otherwise, and shall not use
any such Information
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other than for such purposes as shall be expressly permitted hereunder or
thereunder, except, in each case, to the extent that such Information has been
(i) in the public domain through no fault of such party or any member of such
Group or any of their respective directors, officers, employees, agents,
accountants, counsel and other advisors and representatives, (ii) later lawfully
acquired from other sources by such party (or any member of such party's Group)
which sources are not themselves bound by a confidentiality obligation), or
(iii) independently generated without reference to any proprietary or
confidential Information of the other party.
(b) Each party agrees not to release or disclose, or permit to be
released or disclosed, any such Information to any other Person, except its
directors, officers, employees, agents, accountants, counsel and other advisors
and representatives who need to know such Information (who shall be advised of
their obligations hereunder with respect to such Information), except in
compliance with Section 7.9. Without limiting the foregoing, when any
Information is no longer needed for the purposes contemplated by this Agreement,
any Ancillary Agreement, the Registration Rights Agreements or the Tax
Indemnification and Allocation Agreement, each party will promptly after request
of the other party either return to the other party all Information in a
tangible form (including all copies thereof and all notes, extracts or summaries
based thereon) or certify to the other party that it has destroyed such
Information (and such copies thereof and such notes, extracts or summaries based
thereon).
7.9. PROTECTIVE ARRANGEMENTS. In the event that any party or any member of
its Group either determines on the advice of its counsel that it is required to
disclose any Information pursuant to applicable law or receives any demand under
lawful process or from any Governmental Authority to disclose or provide
Information of any other party (or any member of any other party's Group) that
is subject to the confidentiality provisions hereof, such party shall notify the
other party prior to disclosing or providing such Information and shall
cooperate at the expense of the requesting party in seeking any reasonable
protective arrangements requested by such other party. Subject to the foregoing,
the Person that received such request may thereafter disclose or provide
Information to the extent required by such law (as so advised by counsel) or by
lawful process or such Governmental Authority.
ARTICLE VIII
ARBITRATION; DISPUTE RESOLUTION
8.1. AGREEMENT TO ARBITRATE. Except as otherwise specifically provided in
any Ancillary Agreement, the procedures for discussion, negotiation and
arbitration set forth in this Article VIII shall apply to all disputes,
controversies or claims (whether sounding in contract, tort or otherwise) that
may arise out of or relate to, or arise under or in connection with this
Agreement or any Ancillary Agreement, or the transactions contemplated hereby or
thereby (including all actions taken in furtherance of the transactions
contemplated hereby or thereby on or prior to the date hereof), or the
commercial or economic relationship of the parties relating hereto or thereto,
between or among any member of the CCI Group and the uBid Group. Each party
agrees on behalf of itself and each member of its respective Group that the
procedures set forth in this Article IX shall be the sole and exclusive remedy
in connection with any dispute, controversy or claim relating to any of the
foregoing matters and irrevocably waives any right to commence any Action in or
before any Governmental Authority, except as expressly provided in
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Sections 8.7(b) and 8.8 and except to the extent provided under the Arbitration
Act in the case of judicial review of arbitration results or awards. Each party
on behalf of itself and each member of its respective Group irrevocably waives
any right to any trial by jury with respect to any claim, controversy or dispute
set forth in the first sentence of this Section 8.1.
8.2. ESCALATION. (a) It is the intent of the parties to use their
respective reasonable best efforts to resolve expeditiously any dispute,
controversy or claim between or among them with respect to the matters covered
hereby that may arise from time to time on a mutually acceptable negotiated
basis. In furtherance of the foregoing, any party involved in a dispute,
controversy or claim shall deliver a notice (an "Escalation Notice") demanding
an in person meeting involving representatives of the parties at a senior level
of management of the parties (or if the parties agree, of the appropriate
strategic business unit or division within such entity). A copy of any such
Escalation Notice shall be given to the Chief Financial Officer, or like officer
or official, of each party involved in the dispute, controversy or claim (which
copy shall state that it is an Escalation Notice pursuant to this Agreement).
Any agenda, location or procedure for such discussions or negotiations between
the parties may be established by the parties from time to time; provided,
however, that the parties shall use their reasonable best efforts to meet within
30 days of the Escalation Notice.
(b) The parties may, by mutual consent, retain a mediator to aid the
parties in their discussions and negotiations by informally providing advice to
the parties. Any opinion expressed by the mediator shall be strictly advisory
and shall not be binding on the parties, nor shall any opinion expressed by the
mediator be admissible in any arbitration proceedings. The mediator may be
chosen from a list of mediators previously selected by the parties or by other
agreement of the parties. Costs of the mediation shall be borne equally by the
parties involved in the matter, except that each party shall be responsible for
its own expenses. Mediation is not a prerequisite to a demand for arbitration
under Section 8.3.
8.3. DEMAND FOR ARBITRATION. (a) At any time after the first to occur of
(i) the date of the meeting actually held pursuant to the applicable Escalation
Notice or (ii) 45 days after the delivery of an Escalation Notice (as
applicable, the "Arbitration Demand Date"), any party involved in the dispute,
controversy or claim (regardless of whether such party delivered the Escalation
Notice) may, unless the Applicable Deadline has occurred, make a written demand
(the "Arbitration Demand Notice") that the dispute be resolved by binding
arbitration, which Arbitration Demand Notice shall be given to the parties to
the dispute, controversy or claim in the manner set forth in Section 11.5. In
the event that any party shall deliver an Arbitration Demand Notice to another
party, such other party may itself deliver an Arbitration Demand Notice to such
first party with respect to any related dispute, controversy or claim with
respect to which the Applicable Deadline has not passed without the requirement
of delivering an Escalation Notice. No party may assert that the failure to
resolve any matter during any discussions or negotiations, the course of conduct
during the discussions or negotiations or the failure to agree on a mutually
acceptable time, agenda, location or procedures for the meeting, in each case,
as contemplated by Section 8.2, is a prerequisite to a demand for arbitration
under Section 8.3.
(b) Except as may be expressly provided in any Ancillary Agreement,
any Arbitration Demand Notice may be given until one year and 45 days after the
later of the
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occurrence of the act or event giving rise to the underlying claim or the date
on which such act or event was, or should have been, in the exercise of
reasonable due diligence, discovered by the party asserting the claim (as
applicable and as it may in a particular case be specifically extended by the
parties in writing, the "Applicable Deadline"). Any discussions, negotiations or
mediations between the parties pursuant to this Agreement or otherwise will not
toll the Applicable Deadline unless expressly agreed in writing by the parties.
Each of the parties agrees on behalf of itself and each member of its Group that
if an Arbitration Demand Notice with respect to a dispute, controversy or claim
is not given prior to the expiration of the Applicable Deadline, as between or
among the parties and the members of their Groups, such dispute, controversy or
claim will be barred. Subject to Sections 8.7(d) and 8.8, upon delivery of an
Arbitration Demand Notice pursuant to Section 8.3(a) prior to the Applicable
Deadline, the dispute, controversy or claim shall be decided by a sole
arbitrator in accordance with the rules set forth in this Article VIII.
8.4. ARBITRATORS. (a) Within 15 days after a valid Arbitration Demand
Notice is given, the parties involved in the dispute, controversy or claim
referenced therein shall attempt to select a sole arbitrator satisfactory to all
such parties.
(b) In the event that such parties are not able jointly to select a
sole arbitrator within such 15-day period, such parties shall each appoint an
arbitrator within 30 days after delivery of the Arbitration Demand Notice. If
one party appoints an arbitrator within such time period and the other party or
parties fail to appoint an arbitrator within such time period, the arbitrator
appointed by the one party shall be the sole arbitrator of the matter.
(c) In the event that a sole arbitrator is not selected pursuant to
paragraph (a) or (b) above and, instead, two or three arbitrators are selected
pursuant to paragraph (b) above, the two or three arbitrators will, within 30
days after the appointment of the later of them to be appointed, select an
additional arbitrator who shall act as the sole arbitrator of the dispute. After
selection of such sole arbitrator, the initial arbitrators shall have no further
role with respect to the dispute. In the event that the arbitrators so appointed
do not, within 30 days after the appointment of the later of them to be
appointed, agree on the selection of the sole arbitrator, any party involved in
such dispute may apply to CPR, [New York, New York] to select the sole
arbitrator, which selection shall be made by such organization within 30 days
after such application. Any arbitrator selected pursuant to this paragraph (c)
shall be disinterested with respect to any of the parties and the matter and
shall be reasonably competent in the applicable subject matter.
(d) The sole arbitrator selected pursuant to paragraph (a), (b) or
(c) above will set a time for the hearing of the matter which will commence no
later than 90 days after the date of appointment of the sole arbitrator pursuant
to paragraph (a), (b) or (c) above and which hearing will be no longer than 30
days (unless in the judgment of the arbitrator the matter is unusually complex
and sophisticated and thereby requires a longer time, in which event such
hearing shall be no longer than 90 days). The final decision of such arbitrator
will be rendered in writing to the parties not later than 60 days after the last
hearing date, unless otherwise agreed by the parties in writing.
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(e) The place of any arbitration hereunder will be Los Angeles,
California, unless otherwise agreed by the parties.
8.5. HEARINGS. Within the time period specified in Section 8.4(d), the
matter shall be presented to the arbitrator at a hearing by means of written
submissions of memoranda and verified witness statements, filed simultaneously,
and responses, if necessary in the judgment of the arbitrator or both the
parties. If the arbitrator deems it to be essential to a fair resolution of the
dispute, live cross-examination or direct examination may be permitted, but is
not generally contemplated to be necessary. The arbitrator shall actively manage
the arbitration with a view to achieving a just, speedy and cost-effective
resolution of the dispute, claim or controversy. The arbitrator may, in his or
her discretion, set time and other limits on the presentation of each party's
case, its memoranda or other submissions, and refuse to receive any proffered
evidence, which the arbitrator, in his or her discretion, finds to be
cumulative, unnecessary, irrelevant or of low probative nature. Except as
otherwise set forth herein, any arbitration hereunder will be conducted in
accordance with the CPR Rules for Non-Administered Arbitration of Business
Disputes then prevailing (except that the arbitration will not be conducted
under the auspices of the CPR and the fee schedule of the CPR will not apply).
Except as expressly set forth in Section 8.8(b), the decision of the arbitrator
will be final and binding on the parties, and judgment thereon may be had and
will be enforceable in any court having jurisdiction over the parties.
Arbitration awards will bear interest at an annual rate of the Prime Rate plus
2% per annum. To the extent that the provisions of this Agreement and the
prevailing rules of the CPR conflict, the provisions of this Agreement shall
govern.
8.6. DISCOVERY AND CERTAIN OTHER MATTERS. (a) Any party involved in the
applicable dispute may request limited document production from the other party
or parties of specific and expressly relevant documents, with the reasonable
expenses of the producing party incurred in such production paid by the
requesting party. Any such discovery (which rights to documents shall be
substantially less than document discovery rights prevailing under the Federal
Rules of Civil Procedure) shall be conducted expeditiously and shall not cause
the hearing provided for in Section 8.5 to be adjourned except upon consent of
all parties involved in the applicable dispute or upon an extraordinary showing
of cause demonstrating that such adjournment is necessary to permit discovery
essential to a party to the proceeding. Depositions, interrogatories or other
forms of discovery (other than the document production set forth above) shall
not occur except by consent of the parties involved in the applicable dispute.
Disputes concerning the scope of document production and enforcement of the
document production requests will be determined by written agreement of the
parties involved in the applicable dispute or, failing such agreement, will be
referred to the arbitrator for resolution. All discovery requests will be
subject to the proprietary rights and rights of privilege of the parties, and
the arbitrator will adopt procedures to protect such rights and to maintain the
confidential treatment of the arbitration proceedings (except as may be required
by law). Subject to the foregoing, the arbitrator shall have the power to issue
subpoenas to compel the production of documents relevant to the dispute,
controversy or claim.
(b) The arbitrator shall have full power and authority to determine
issues of arbitrability but shall otherwise be limited to interpreting or
construing the applicable provisions of this Agreement or any Ancillary
Agreement, and will have no authority or power to limit, expand, alter, amend,
modify, revoke or suspend any condition or provision of this Agreement or any
Ancillary Agreement; it being understood, however, that the arbitrator will have
full authority to implement the provisions of this Agreement or
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any Ancillary Agreement, and to fashion appropriate remedies for breaches of
this Agreement (including interim or permanent injunctive relief); provided that
the arbitrator shall not have (i) any authority in excess of the authority a
court having jurisdiction over the parties and the controversy or dispute would
have absent these arbitration provisions or (ii) any right or power to award
punitive or treble damages. It is the intention of the parties that in rendering
a decision the arbitrator give effect to the applicable provisions of this
Agreement and the Ancillary Agreements and follow applicable law (it being
understood and agreed that this sentence shall not give rise to a right of
judicial review of the arbitrator's award).
(c) If a party fails or refuses to appear at and participate in an
arbitration hearing after due notice, the arbitrator may hear and determine the
controversy upon evidence produced by the appearing party.
(d) Arbitration costs will be borne equally by each party involved
in the matter, except that each party will be responsible for its own attorney's
fees and other costs and expenses, including the costs of witnesses selected by
such party.
8.7. CERTAIN ADDITIONAL MATTERS. (a) Any arbitration award shall be a bare
award limited to a holding for or against a party and shall be without findings
as to facts, issues or conclusions of law (including with respect to any matters
relating to the validity or infringement of patents or patent applications) and
shall be without a statement of the reasoning on which the award rests, but must
be in adequate form so that a judgment of a court may be entered thereupon.
Judgment upon any arbitration award hereunder may be entered in any court having
jurisdiction thereof.
(b) Prior to the time at which an arbitrator is appointed pursuant
to Section 8.4, any party may seek one or more temporary restraining orders in a
court of competent jurisdiction if necessary in order to preserve and protect
the status quo. Neither the request for, or grant or denial of, any such
temporary restraining order shall be deemed a waiver of the obligation to
arbitrate as set forth herein and the arbitrator may dissolve, continue or
modify any such order. Any such temporary restraining order shall remain in
effect until the first to occur of the expiration of the order in accordance
with its terms or the dissolution thereof by the arbitrator.
(c) Except as required by law, the parties shall hold, and shall
cause their respective officers, directors, employees, agents and other
representatives to hold, the existence, content and result of mediation or
arbitration in confidence in accordance with the provisions of Article VIII and
except as may be required in order to enforce any award. Each of the parties
shall request that any mediator or arbitrator comply with such confidentiality
requirement.
(d) In the event that at any time the sole arbitrator shall fail to
serve as an arbitrator for any reason, the parties shall select a new arbitrator
who shall be disinterested as to the parties and the matter in accordance with
the procedures set forth herein for the selection of the initial arbitrator. The
extent, if any, to which testimony previously given shall be repeated or as to
which the replacement arbitrator elects to rely on the stenographic record (if
there is one) of such testimony shall be determined by the replacement
arbitrator.
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8.8. LIMITED COURT ACTIONS. (a) Notwithstanding anything herein to the
contrary, in the event that any party reasonably determines the amount in
controversy in any dispute, controversy or claim (or any series of related
disputes, controversies or claims) under this Agreement or any Ancillary
Agreement is, or is reasonably likely to be, in excess of $5 million and if such
party desires to commence an Action in lieu of complying with the arbitration
provisions of this Article, such party shall so state in its Arbitration Demand
Notice. If the other parties to the arbitration do not agree that the amount in
controversy in such dispute, controversy or claim (or such series of related
disputes, controversies or claims) is, or is reasonably likely to be, in excess
of $5 million, the arbitrator selected pursuant to Section 8.4 hereof shall
decide whether the amount in controversy in such dispute, controversy or claim
(or such series of related disputes, controversies or claims) is, or is
reasonably likely to be, in excess of $5 million. The arbitrator shall set a
date that is no later than ten days after the date of his or her appointment for
submissions by the parties with respect to such issue. There shall not be any
discovery in connection with such issue. The arbitrator shall render his or her
decision on such issue within five days of such date so set by the arbitrator.
In the event that the arbitrator determines that the amount in controversy in
such dispute, controversy or claim (or such series of related disputes,
controversies or claims) is or is reasonably likely to be in excess of $5
million, the provisions of Sections 8.4(d) and (e), 8.5, 8.6, 8.7 and 8.10
hereof shall not apply and on or before (but, except as expressly set forth in
Section 8.8(b), not after) the tenth business day after the date of such
decision, any party to the arbitration may elect, in lieu of arbitration, to
commence an Action with respect to such dispute, controversy or claim (or such
series of related disputes, controversies or claims) in any court of competent
jurisdiction. If the arbitrator does not so determine, the provisions of this
Article (including with respect to time periods) shall apply as if no
determinations were sought or made pursuant to this Section 8.8(a).
(b) In the event that an arbitration award in excess of $5 million
is issued in any arbitration proceeding commenced hereunder, any party may,
within 60 days after the date of such award, submit the dispute, controversy or
claim (or series of related disputes, controversies or claims) giving rise
thereto to a court of competent jurisdiction, regardless of whether such party
or any other party sought to commence an Action in lieu of proceeding with
arbitration in accordance with Section 8.8(a). In such event, the applicable
court may elect to rely on the record developed in the arbitration or, if it
determines that it would be advisable in connection with the matter, allow the
parties to seek additional discovery or to present additional evidence. Each
party shall be entitled to present arguments to the court with respect to
whether any such additional discovery or evidence shall be permitted and with
respect to all other matters relating to the applicable dispute, controversy or
claim (or series of related disputes, controversies or claims).
8.9. CONTINUITY OF SERVICE AND PERFORMANCE. Unless otherwise agreed in
writing, the parties will continue to provide service and honor all other
commitments under this Agreement and each Ancillary Agreement during the course
of dispute resolution pursuant to the provisions of this Article VIII with
respect to all matters not subject to such dispute, controversy or claim.
8.10. LAW GOVERNING ARBITRATION PROCEDURES. The interpretation of the
provisions of this Article VIII, only insofar as they relate to the agreement to
arbitrate and any procedures pursuant thereto, shall be governed by the
Arbitration Act and other applicable
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federal law. In all other respects, the interpretation of this Agreement shall
be governed as set forth in Section 11.2.
ARTICLE IX
FURTHER ASSURANCES AND ADDITIONAL COVENANTS
9.1. FURTHER ASSURANCES. (a) In addition to the actions specifically
provided for elsewhere in this Agreement, each of the parties hereto shall use
its reasonable best efforts, prior to, on and after the Closing Date, to take,
or cause to be taken, all actions, and to do, or cause to be done, all things
reasonably necessary, proper or advisable under applicable laws, regulations and
agreements to consummate and make effective the transactions contemplated by
this Agreement, the Ancillary Agreements, the Registration Rights Agreements and
the Tax Indemnification and Allocation Agreement.
(b) Without limiting the foregoing, prior to, on and after the
Closing Date, each party hereto shall cooperate with the other parties, and
without any further consideration, but at the expense of the requesting party,
to execute and deliver, or use its reasonable best efforts to cause to be
executed and delivered, all instruments, including instruments of conveyance,
assignment and transfer, and to make all filings with, and to obtain all
consents, approvals or authorizations of, any Governmental Authority or any
other Person under any permit, license, agreement, indenture or other instrument
and to take all such other actions as such party may reasonably be requested to
take by any other party hereto from time to time, consistent with the terms of
this Agreement and the Ancillary Agreements, in order to effectuate the
provisions and purposes of this Agreement and the Ancillary Agreements and the
other transactions contemplated hereby and thereby. Without limiting the
foregoing, each party will, at the reasonable request, cost and expense of any
other party, take such other actions as may be reasonably necessary to vest in
such other party good and marketable title, free and clear of any Security
Interest, if and to the extent it is practicable to do so.
(c) On or prior to the Closing Date, CCI and uBid in their
respective capacities as direct and indirect stockholders of their respective
Subsidiaries, shall each ratify any actions which are reasonably necessary or
desirable to be taken by CCI, uBid or any other Subsidiary of CCI, as the case
may be, to effectuate the transactions contemplated by this Agreement.
(d) The parties hereto agree to take any reasonable actions
necessary in order for the Distribution to qualify as a tax-free distribution
pursuant to Section 355 of the Code.
(e) CCI and uBid, and each of the members of their respective
Groups, waive (and agree not to assert against any of the others) any claim or
demand that any of them may have against any of the others for any Liabilities
or other claims relating to or arising out of: (i) the failure of uBid or any
member of the uBid Group, on the one hand, or of CCI or any member of the CCI
Group, on the other hand, to provide any notification or disclosure required
under any state Environmental Law in connection with the transactions
contemplated by this Agreement, or (ii) any inadequate, incorrect or incomplete
notification or disclosure under any such state Environmental Law by the
applicable transferor.
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(f) Prior to the Closing Date, if one or more of the parties
identifies any commercial or other service that is needed to assure a smooth and
orderly transition of the businesses in connection with the consummation of the
transactions contemplated hereby, and that is not otherwise governed by the
provisions of this Agreement or any Ancillary Agreement, the parties will
cooperate in determining whether there is a mutually acceptable arm's-length
basis on which one or more of the other parties will provide such service.
9.2. QUALIFICATION AS TAX-FREE DISTRIBUTION. After the Closing Date,
neither CCI nor uBid shall take, or permit any member of its respective Group to
take, any action which could reasonably be expected to prevent the Distribution
from qualifying as a tax-free distribution within the meaning of Section 355 of
the Code or any other transaction contemplated by this Agreement or any
Ancillary Agreement which is intended by the parties to be tax-free from failing
so to qualify. Without limiting the foregoing, after the Closing Date and on or
prior to the Distribution Date, uBid shall not issue or grant, and shall not
permit any member of the uBid Group to issue or grant, directly or indirectly,
any shares of uBid Common Stock or any rights, warrants, options or other
securities to purchase or acquire (whether upon conversion, exchange or
otherwise) any shares of uBid Common Stock (whether or not then exercisable,
convertible or exchangeable) except for grants of stock options to employees and
directors or uBid that by their terms cannot be exercised until after the
earlier of (i) the Distribution Date or (ii) 18 months following the Closing
Date.
ARTICLE X
TERMINATION
10.1. TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated at
any time prior to the Distribution Date by the mutual consent of CCI and uBid.
10.2. OTHER TERMINATION. This Agreement may be terminated by CCI at any
time prior to the Closing Date. The obligations of the parties under Article III
(including the obligation to pursue or effect the Distribution) may be
terminated by CCI if the Distribution Date shall not have occurred on or before
December 31, 1999.
10.3. EFFECT OF TERMINATION. (a) In the event of any termination of this
Agreement prior to the Closing Date, no party to this Agreement (or any of its
directors or officers) shall have any Liability or further obligation to any
other party.
(b) In the event of any termination of this Agreement on or after
the Closing Date, only the provisions of Article III will terminate and the
other provisions of this Agreement, each Ancillary Agreement and the
Registration Rights Agreements shall remain in full force and effect.
ARTICLE XI
MISCELLANEOUS
11.1. COUNTERPARTS; ENTIRE AGREEMENT; CORPORATE POWER. (a) This Agreement
may be executed in one or more counterparts, all of which shall be considered
one
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and the same agreement, and shall become effective when one or more counterparts
have been signed by each of the parties and delivered to the other party.
(b) This Agreement, and the Exhibits, Schedules and Appendices
hereto contain the entire agreement between the parties with respect to the
subject matter hereof, supersede all previous agreements, negotiations,
discussions, writings, understandings, commitments and conversations with
respect to such subject matter and there are no agreements or understandings
between the parties other than those set forth or referred to herein or therein.
(c) CCI represents on behalf of itself and each other member of the
CCI Group and uBid represents on behalf of itself and each other member of the
uBid Group as follows:
(i) each such Person has the requisite corporate or other
power and authority and has taken all corporate or other action necessary
in order to execute, deliver and perform each of this Agreement, each of
the Ancillary Agreements, the Registration Rights Agreements and the Tax
Indemnification and Allocation Agreement to which it is a party and to
consummate the transactions contemplated hereby and thereby; and
(ii) this Agreement, each Ancillary Agreement, the Registration
Rights Agreements and the Tax Indemnification and Allocation Agreement to
which it is a party has been duly executed and delivered by it and
constitutes a valid and binding agreement of it enforceable in accordance
with the terms thereof.
11.2. GOVERNING LAW. Except as set forth in Section 8.10, this Agreement
shall be governed by and construed and interpreted in accordance with the laws
of the State of California (other than as to its laws of arbitration which shall
be governed under the Arbitration Act or other applicable federal law pursuant
to Section 8.10), irrespective of the choice of laws principles of the State of
California, as to all matters, including matters of validity, construction,
effect, enforceability, performance and remedies.
11.3. ASSIGNABILITY. Except as set forth in any Ancillary Agreement, the
Registration Rights Agreements or the Tax Indemnification and Allocation
Agreement, this Agreement, each Ancillary Agreement, the Registration Rights
Agreements and the Tax Indemnification and Allocation Agreement shall be binding
upon and inure to the benefit of the parties hereto and thereto, respectively,
and their respective successors and assigns; provided, however, that no party
hereto or thereto may assign its respective rights or delegate its respective
obligations under this Agreement, any Ancillary Agreement, the Registration
Rights Agreements or the Tax Indemnification and Allocation Agreement without
the express prior written consent of the other parties hereto or thereto.
11.4. THIRD PARTY BENEFICIARIES. Except for the indemnification rights
under this Agreement of any CCI Indemnitee or uBid Indemnitee in their
respective capacities as such, (a) the provisions of this Agreement, each
Ancillary Agreement, the Registration Rights Agreements and the Tax
Indemnification and Allocation Agreement are solely for the benefit of the
parties and are not intended to confer upon any Person except the parties any
rights or remedies hereunder, and (b) there are no third party beneficiaries of
this Agreement, any Ancillary Agreement, the Registration Rights Agreements or
the Tax Indemnification and
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Allocation Agreement and none of this Agreement, any Ancillary Agreement, the
Registration Rights Agreements or the Tax Indemnification and Allocation
Agreement shall provide any third person with any remedy, claim, liability,
reimbursement, claim of action or other right in excess of those existing
without reference to this Agreement, any Ancillary Agreement, the Registration
Rights Agreements or the Tax Indemnification and Allocation Agreement. No party
hereto shall have any right, remedy or claim with respect to any provision of
this Agreement, any Ancillary Agreement, the Registration Rights Agreements or
the Tax Indemnification and Allocation Agreement to the extent such provision
relates solely to the other two parties hereto or the members of such other two
parties' respective Groups.
11.5. NOTICES. All notices requests, demands, waivers and other
communications under this Agreement, any Ancillary Agreement or the Tax
Indemnification and Allocation Agreement shall be in writing and shall be deemed
to have been duly given if delivered personally or by facsimile transmission or
mailed (certified or registered mail, postage prepaid, return receipt
requested):
If to CCI, to: Creative Computers, Inc.
2555 West 190th Street
Torrance, California 90504
Attention: Chief Financial Officer
Fax No.: (310) 354-5645
If to uBid: uBid, Inc.
2525 Busse Highway
Elk Grove Village, Illinois 60007
Attention: Chief Financial Officer
Fax No.: (847) 616-0318
or to such other person or address as any party shall specify by notice in
writing to the other party. All such notices, requests, demands, waivers and
communications shall be deemed to have been received on the date on which hand
delivered, upon transmission of the facsimile transmission by the sender and
issuance by the transmitting machine of a confirmation slip confirming that the
number of pages constituting the notice have been transmitted without error, or
on the third business day following the date on which so mailed, except for a
notice of change of address, which shall be effective only upon receipt thereof.
In the case of a notice sent by facsimile transmission, the sender shall
contemporaneously mail a copy of the notice to the addressee at the address
provided for above. However, such mailing shall in no way alter the time at
which the facsimile notice is deemed received. In no event shall the provision
of notice pursuant to this Section 11.5 constitute notice for service of
process.
11.6. SEVERABILITY. If any provision of this Agreement, any Ancillary
Agreement, the Registration Rights Agreements or the Tax Indemnification and
Allocation Agreement or the application thereof to any Person or circumstance is
determined by a court of competent jurisdiction to be invalid, void or
unenforceable, the remaining provisions hereof or thereof, or
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the application of such provision to Persons or circumstances or in
jurisdictions other than those as to which it has been held invalid or
unenforceable, shall remain in full force and effect and shall in no way be
affected, impaired or invalidated thereby, so long as the economic or legal
substance of the transactions contemplated hereby or thereby, as the case may
be, is not affected in any manner adverse to any party. Upon such determination,
the parties shall negotiate in good faith in an effort to agree upon such a
suitable and equitable provision to effect the original intent of the parties.
11.7. FORCE MAJEURE. No party shall be deemed in default of this Agreement,
any Ancillary Agreement, the Registration Rights Agreements or the Tax
Indemnification and Allocation Agreement to the extent that any delay or failure
in the performance of its obligations under this Agreement, any Ancillary
Agreement, the Registration Rights Agreements or the Tax Indemnification and
Allocation Agreement results from any cause beyond its reasonable control and
without its fault or negligence, such as acts of God, acts of civil or military
authority, embargoes, epidemics, war, riots, insurrections, fires, explosions,
earthquakes, floods, unusually severe weather conditions, labor problems or
unavailability of parts, or, in the case of computer systems, any failure in
electrical or air conditioning equipment. In the event of any such excused
delay, the time for performance shall be extended for a period equal to the time
lost by reason of the delay.
11.8. PUBLICITY. Prior to the Distribution, each of uBid and CCI shall
consult with each other prior to issuing any press releases or otherwise making
public statements with respect to the IPO, the Distribution or any of the other
transactions contemplated hereby and prior to making any filings with any
Governmental Authority with respect thereto.
11.9. EXPENSES. uBid shall pay all third-party costs, fees and expenses
relating to the IPO, all of the reimbursable expenses of the Underwriters
pursuant to the Underwriting Agreement, all of the costs of producing, printing,
mailing and otherwise distributing any Prospectus, as well as the Underwriters'
discount provided for in the Underwriting Agreement. Except as expressly set
forth in this Agreement (including Section 3.1(h) hereof) or in any Ancillary
Agreement, the Registration Rights Agreements or in the Tax Indemnification and
Allocation Agreement, whether or not the Distribution is consummated, each party
hereto shall bear its own respective third party fees, costs and expenses paid
or incurred in connection with the Distribution.
11.10. HEADINGS. The article, section and paragraph headings contained in
this Agreement and in the Ancillary Agreements, the Registration Rights
Agreements and the Tax Indemnification and Allocation Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement or any Ancillary Agreement.
11.11. SURVIVAL OF COVENANTS. Except as expressly set forth in any
Ancillary Agreement, the Registration Rights Agreements and the Tax
Indemnification and Allocation Agreement, the covenants, representations and
warranties contained in this Agreement and each Ancillary Agreement, and
liability for the breach of any obligations contained herein, shall survive each
of the IPO and the Distribution.
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11.12. WAIVERS OF DEFAULT. Waiver by any party of any default by the other
party of any provision of this Agreement, any Ancillary Agreement, the
Registration Rights Agreements or the Tax Indemnification and Allocation
Agreement shall not be deemed a waiver by the waiving party of any subsequent or
other default, nor shall it prejudice the rights of the other party.
11.13. SPECIFIC PERFORMANCE. In the event of any actual or threatened
default in, or breach of, any of the terms, conditions and provisions of this
Agreement, any Ancillary Agreement, the Registration Rights Agreements or the
Tax Indemnification and Allocation Agreement, the party or parties who are or
are to be thereby aggrieved shall have the right to specific performance and
injunctive or other equitable relief of its rights under this Agreement, such
Ancillary Agreement, the Registration Rights Agreements or the Tax
Indemnification and Allocation Agreement, in addition to any and all other
rights and remedies at law or in equity, and all such rights and remedies shall
be cumulative. The parties agree that the remedies at law for any breach or
threatened breach, including monetary damages, are inadequate compensation for
any loss and that any defense in any action for specific performance that a
remedy at law would be adequate is waived. Any requirements for the securing or
posting of any bond with such remedy are waived.
11.14. AMENDMENTS. (a) No provisions of this Agreement, any Ancillary
Agreement, the Registration Rights Agreements or the Tax Indemnification and
Allocation Agreement shall be deemed waived, amended, supplemented or modified
by any party, unless such waiver, amendment, supplement or modification is in
writing and signed by the authorized representative of the party against whom it
is sought to enforce such waiver, amendment, supplement or modification.
(b) Without limiting the foregoing, the parties anticipate that,
prior to the Closing Date, some or all of the Schedules to this Agreement may be
amended or supplemented and, in such event, such amended or supplemented
Schedules shall be attached hereto in lieu of the original Schedules.
11.15. INTERPRETATION. Words in the singular shall be held to include the
plural and vice versa and words of one gender shall be held to include the other
genders as the context requires. The terms "hereof," "herein," and "herewith"
and words of similar import shall, unless otherwise stated, be construed to
refer to this Agreement (or the applicable Ancillary Agreement, the Registration
Rights Agreements or the Tax Indemnification and Allocation Agreement) as a
whole (including all of the Schedules, Exhibits and Appendices hereto and
thereto) and not to any particular provision of this Agreement (or such
Ancillary Agreement, the Registration Rights Agreements or the Tax
Indemnification and Allocation Agreement). Article, Section, Exhibit, Schedule
and Appendix references are to the Articles, Sections, Exhibits, Schedules and
Appendices to this Agreement (or the applicable Ancillary Agreement) unless
otherwise specified. The word "including" and words of similar import when used
in this Agreement (or the applicable Ancillary Agreement, the Registration
Rights Agreements or the Tax Indemnification and Allocation Agreement) shall
mean "including, without limitation," unless the context otherwise requires or
unless otherwise specified. The word "or" shall not be exclusive. For all
purposes of this Agreement, "allocated costs of in-house counsel and other
personnel" shall be determined in accordance with the principles set forth in
Schedule 11.15.
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IN WITNESS WHEREOF, the parties have caused this Separation and
Distribution Agreement to be executed by their duly authorized representatives.
CREATIVE COMPUTERS, INC.
By:
----------------------------------
Name: Frank F. Khulusi
Title: Chairman, President and
Chief Executive Officer
uBID, INC.
By:
----------------------------------
Name: Gregory K. Jones
Title: President and Chief Executive Officer
34
<PAGE>
EXHIBIT A
REGISTRATION RIGHTS AGREEMENT
-----------------------------
REGISTRATION RIGHTS AGREEMENT, dated as of ______________, 1998, by and
among uBid, Inc., a Delaware corporation ("uBid"), and Creative Computers, Inc.,
a Delaware corporation ("CCI").
WHEREAS, uBid is currently a wholly-owned subsidiary of CCI;
WHEREAS, uBid is considering an initial public offering of its Common Stock
("IPO");
WHEREAS, after the IPO, CCI will own approximately 82.3% of the outstanding
shares of uBid's Common Stock (80.1% if the underwriters' over-allotment option
is exercised in full) (the "Retained Shares");
WHEREAS, subject to the conditions set forth in the Separation and
Distribution Agreement, dated as of _________________, 1998, by and between CCI
and uBid (the "Separation and Distribution Agreement"), CCI will distribute to
its stockholders, not earlier than six months following the IPO, all of the
Retained Shares in a tax-free distribution (the "Distribution"); and
WHEREAS, uBid and CCI desire to establish terms and conditions for the
registration for public resale of the Retained Shares (a) after the IPO and
prior to the Distribution and (b) in the event that the Separation and
Distribution Agreement is terminated prior to the Distribution.
NOW, THEREFORE, in consideration of the premises and mutual promises and
representations contained herein, and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the parties hereto do mutually
covenant, stipulate and agree as follows:
Section 1. Definitions.
-----------
The following terms shall have the following meanings unless the context
otherwise indicates:
"Act" means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
"Business Day" means a day on which the New York Stock Exchange is open for
business.
"Demand Registration" means registration under the Act pursuant to a
Registration Request given under Section 2 hereof.
"Indemnified Persons" shall have the meaning given in Section 9 hereof.
"NASDAQ" means the Nasdaq National Market of The Nasdaq Stock Market.
"Piggyback Registration" means registration under the Act pursuant to
Section 3 hereof.
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"Piggyback Request" means a written request to uBid pursuant to Section 3
hereof for the registration of Registerable Shares pursuant to the Act.
"Priority" shall have the meaning given in Section 6 hereof.
"Registration Expenses" shall have the meaning given in Section 5 hereof.
"Registration Request" means a written request to uBid pursuant to Section
2 hereof for Demand Registration of Registerable Shares pursuant to the Act.
"Registerable Shares" means the approximately [7,329,883] Shares covered by
this Agreement which will be owned by CCI after the IPO and prior to the
Distribution, such number to be equitably adjusted in the event of a stock
split, stock dividend, combination or reclassification of Shares.
"Selling Expenses" shall have the meaning given in Section 5 hereof.
"Shares" means shares of the Common Stock, $.001 par value, of uBid.
"SEC" means the Securities and Exchange Commission.
Section 2. Demand Registration.
-------------------
(a) At any time during the period beginning one hundred eighty (180) days
following the IPO and prior to the Distribution or, should the Separation and
Distribution Agreement be terminated prior to the Distribution, at any time
thereafter, CCI may submit a Registration Request for Demand Registration
covering all or part of the Registerable Shares, which request must request
registration of at least the Minimum Amount. The Registration Request shall
state the number of Registerable Shares to be registered and the intended plan
of distribution thereof. uBid shall be obligated to register Registerable
Shares pursuant to this Section 2 on a total of only two (2) occasions. A
request withdrawn pursuant to Subsection 2(c) hereof or deemed to be a Piggyback
Registration pursuant to Subsection 2(d) hereof shall be ignored for this
purpose. uBid shall be deemed to have satisfied its obligation under this
Section 2 with respect to a Registration Request if a registration statement
filed pursuant to a Registration Request becomes effective under the Act and
remains effective for the period required hereby, or if the failure of such a
registration statement to become or remain effective results primarily from any
action or inaction of CCI.
Subject to the conditions and limitations of Section 4 hereof, uBid will
use its best efforts to file a registration statement under the Act registering
the Registerable Shares covered by a Registration Request within forty-five (45)
days after it receives such Registration Request unless such Registration
Request is withdrawn as permitted by Subsection 2(c) hereof.
(b) The right to Demand Registration is subject to the procedures in
Section 4 hereof and the following additional conditions and limitations:
(i) CCI may withdraw the Registerable Shares from a Registration
Request at any time prior to the time the registration statement becomes
effective, provided that uBid may ignore a notice of withdrawal made within 24
hours of the time the registration statement becomes
2
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effective. Following such a withdrawal, uBid shall not take any further action
to register the withdrawn Registerable Shares, and shall not be obligated to
register any Registerable Shares if the number of non-withdrawn Registerable
Shares is less than the Minimum Amount. However, except as otherwise provided in
Subsection 2(c) or (d) hereof, a Registration Request, once made, shall count as
having been made for purposes of Subsection 2(a), unless it is withdrawn by CCI
within fifteen (15) days after having been made or it is withdrawn before uBid
devotes any significant efforts to the preparation of the registration
statement.
(ii) No Registration Request may be made within ninety (90) days after
the effective date of a registration statement filed by uBid under the Act
covering an underwritten public offering of its equity securities (except for
the registration statement relating to the IPO);
(iii) Unless otherwise agreed to by uBid, any Demand Registration must
relate to a firm commitment underwriting for which the managing underwriter
shall be reasonably satisfactory to uBid (such satisfaction not to be withheld
unreasonably) or a non-underwritten offering on a "shelf" basis in accordance
with Rule 415 under the Act.
(iv) uBid shall be permitted to use any registration form available to
it for the registration of Registerable Shares, and shall not be obligated to
include in the prospectus any information that may be incorporated by reference
or that is not required to be included therein by the applicable registration
form.
(v) No Registration Request may be made by CCI if the amount of
shares proposed to be sold could be sold by CCI without limitation under Rule
144 under the Act.
(c) Notwithstanding the foregoing, if uBid is aware at the time it receives
a Registration Request that a registered public sale of Shares is being
contemplated or is in the process of being prepared (except as provided in
Section 7 hereof), it will notify CCI of the relevant facts, and CCI shall have
the right to withdraw the Registration Request by written notice given to uBid
within ten (10) days after uBid's notice under this Subsection 2(c), in which
case such Registration Request will be deemed not to have been made for purposes
of Subsection 2(a).
(d) For an additional 90 days following the date on which CCI may first
submit a Registration Request for Demand Registration, uBid will be entitled to
include Shares in any Demand Registration and to reduce the number of Shares to
be sold by CCI thereunder to a minimum of 20%, collectively, of the total
offering plus any underwriters' over-allotment option. If, as a result of this
cutback procedure, the number of Shares sold by uBid in such offering
constitutes more than one-half of the total shares sold in the offering, the
registration would be treated as a Piggyback Registration under Section 3 below,
and a Registration Request will be deemed not to have been made for purposes of
Subsection 2(a) hereof.
Section 3. Piggyback Registration. If at any time following one hundred
----------------------
eighty (180) days after the IPO uBid proposes to register any Shares under the
Act for sale to the public by uBid or any other person (except as provided in
Section 7 hereof), uBid shall, not less than fifteen (15) days prior to the
proposed date of filing of a registration statement under the Act, give written
notice to CCI of its intention to do so. A Piggyback Request from CCI shall
state the number of Registerable Shares to be registered and the intended plan
of distribution thereof. If uBid receives a
3
<PAGE>
Piggyback Request from CCI given within fifteen (15) days after uBid's notice
under this Section 3, uBid, subject to the conditions and limitations of Section
4 hereof, will use its best efforts to cause the Registerable Shares covered by
Piggyback Request to be so registered under the Act in the proposed registration
statement if the proposed registration statement becomes effective, but uBid
shall have no obligation to cause, or use any efforts to cause, any such
registration statement to become effective. Registerable Shares covered by a
Piggyback Request shall be sold pursuant to the same plan of distribution that
applies to the majority of the other Shares covered by such registration
statement, except to the extent that uBid otherwise agrees in writing. The
rights to Piggyback Registration granted by this Section 3 may be exercised an
unlimited number of occasions following the IPO. No Piggyback Request may be
made by CCI if the amount of Shares proposed to be sold could be sold by CCI
without limitation under Rule 144 under the Act.
Section 4. Registration Procedures.
-----------------------
(a) If uBid is required by the provisions of Section 2 to effect Demand
Registration of any Registerable Shares, uBid will promptly:
(i) To the extent required by Section 2, prepare and file with the
SEC a registration statement (which shall be on Form S-3, unless uBid does not
qualify for use of Form S-3 in such registration, in which case such
registration statement shall be on any other available form selected by uBid)
with respect to such Registerable Shares and thereafter use its best efforts to
cause such registration statement to become effective promptly.
(ii) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective for the period of
ninety (90) days (excluding any days during which the right to sell shares is
suspended pursuant to Subsection 4(b) hereof) or such lesser period as may be
necessary to comply with the provisions of the Act with respect to the
disposition of all Registerable Shares covered by such registration statement in
accordance with the plan of distribution set forth in such registration
statement;
(iii) Comply with Rule 424 under the Act relating to filing of
prospectuses and furnish to each seller and to each underwriter such number of
copies of the registration statement and the prospectus included therein
(including each preliminary prospectus) as such persons reasonably may request
in order to facilitate the public sale of the Registerable Shares covered by
such registration statement;
(iv) If the offering is to be underwritten, uBid and CCI shall enter
into a written agreement with any managing underwriter selected in the manner
herein provided in such form and containing such provisions as are satisfactory
to uBid and CCI (such satisfaction not to be withheld unreasonably), and as are
customary in the securities business for such an arrangement between such
underwriter, such seller and corporations of uBid's size and investment stature
and uBid shall take such other actions as CCI shall reasonably request in order
to expedite or facilitate the disposition of such Registerable Shares;
4
<PAGE>
(v) Furnish, at the request of CCI, on the date that the
underwriting agreement is signed and on the date that Registerable Shares are
delivered to the underwriters for sale pursuant to such registration: (A) an
opinion of counsel representing uBid for the purposes of such registration,
dated such dates, respectively, addressed to the underwriters and to CCI,
stating that such registration statement has become effective under the Act and
that (I) to the best knowledge of such counsel, no stop order suspending the
effectiveness thereof has been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under the Act, and (II) the
registration statement, the related prospectus and each amendment or supplement
thereof comply as to form in all material respects with the requirements of the
Act (except that such counsel need not express any opinion as to the financial
statements or any other financial statements, notes thereto and related
schedules and other financial and statistical data contained or incorporated by
reference therein, and (III) to such other effects as reasonably may be
requested by counsel for the underwriters or by CCI or its counsel, and (B) a
"comfort letter" in customary form dated such dates from the independent public
accountants retained by uBid, addressed to the underwriters and to CCI, stating
that they are independent public accountants within the meaning of the Act and
that, in the opinion of such accountants, the financial statements of uBid
included or incorporated by reference in the registration statement or the
prospectus, or any amendment or supplement thereof, comply as to form in all
material respects with the applicable accounting requirements of the Act, and
such letter shall additionally cover such other financial matters as are
customary to cover in such a letter (including information as to the period
ending no more than five business days prior to the date of such letter) with
respect to the registration statement in respect of which such letter is being
given as such underwriters reasonably may request;
(vi) Upon receipt of such confidentiality agreements as uBid may
reasonably request, make available for inspection by CCI, any underwriter
participating in any distribution pursuant to such registration statement, and
any attorney, accountant or other agent retained by CCI or underwriter, all
financial and other records, pertinent corporate documents and properties of
uBid, and cause uBid officers, directors and employees to supply all information
reasonably requested by CCI or any underwriter, attorney, accountant or agent in
connection with such registration statement, in each case in order to confirm
disclosures contained in the registration statement or incorporated therein by
reference;
(vii) Give CCI two (2) days' advance notice of its anticipated filing
date of the registration statement and amendments thereto;
(viii) Use its best efforts to cause the Registerable Shares covered by
such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable CCI thereof
to consummate the disposition of such Registerable Shares;
(ix) Comply with all applicable rules and regulations of the SEC, and
make generally available to its security holders, as soon as reasonably
practicable no later than the date the Form 10-Q or Form 10-K, as the case may
be, covering the fourth fiscal quarter of uBid commencing after the effective
date of the registration statement, is required to be filed with the SEC], an
earnings statement covering the period of at least twelve (12) consecutive
months beginning with the first day of uBid's first calendar quarter commencing
after the effective date of
5
<PAGE>
the registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Act and Rule 158 thereunder;
(x) Provide a transfer agent and registrar, which may be the same
entity as the transfer agent, for all the Registerable Shares covered by such
registration statement not later than the effective date of such registration
statement;
(xi) Permit CCI to participate through counsel reasonably acceptable
to uBid in the preparation of such registration statement and, if specifically
requested by such counsel, in discussions between uBid and the SEC or its staff
with respect to such registration statement, and to include in such registration
statement material, furnished to uBid in writing, which in the written opinion
of such counsel is necessary to include in order to avoid potential liability
for CCI;
(xii) Use its best efforts to cause all such Registerable Shares
covered by such registration statement to be listed or quoted on the principal
securities exchange (including NASDAQ) on which similar securities issued by
uBid are then listed or quoted, if the listing or quoting of such Registerable
Shares is then permitted under the rules of such exchange;
(xiii) If there is a stop order relating to or suspension of the
effectiveness of the registration statement, use its best efforts to have the
stop order or suspension of effectiveness withdrawn as promptly as practicable;
(xiv) Use its best efforts to comply with all applicable rules and
regulations of the SEC, and make generally available to its security holders an
earnings statement satisfying the provisions of Section 11(a) of the Act, no
later than forty-five (45) days after the end of any twelve-month period (or
ninety (90) days, if such period is a fiscal year) (A) commencing at the end of
any fiscal quarter in which the Registerable Shares are sold to underwriters in
a firm or best efforts underwritten offering, or (B) if not sold to underwriters
in such an offering, beginning with the first month of the first fiscal quarter
of uBid commencing after the effective date of the registration statement, which
statements shall cover such twelve-month period; and
(xv) Use its best efforts to register or qualify the Registerable
Shares covered by such registration statement under the securities or blue sky
laws of such jurisdictions as the sellers of Registerable Shares or the managing
underwriter reasonably shall request; provided, however, that uBid shall not for
any such purpose be required to qualify generally to transact business as a
foreign corporation in any jurisdiction where it is not so qualified or to
consent to general service of process or taxation in any such jurisdiction.
(b) Notwithstanding the foregoing, uBid may delay filing a registration
statement otherwise required to be filed pursuant to this Agreement, and may
withhold efforts to cause a registration statement covering Registerable Shares
to become effective for a period of up to ninety (90) days, if uBid determines
in good faith that such registration statement might (1) interfere with or
affect the negotiation or completion of any transaction that is being
contemplated by uBid (whether or not a final decision has been made to undertake
such transaction) at the time the right to delay is exercised, or (2) involve
initial or continuing disclosure obligations that might not be in the best
interest of uBid's stockholders. If, after a registration statement becomes
effective, uBid notifies the holders of Registerable Shares covered by such
registration statement that uBid
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<PAGE>
considers it appropriate for the registration statement to be amended or
supplemented, the holders of such Registerable Shares shall suspend any further
sales of their Registerable Shares until uBid advises them that the registration
statement has been amended or supplemented. uBid may give such advice if there
exists at any time material non-public information relating to uBid that, in the
reasonable opinion of uBid's Board of Directors, would be prejudicial to uBid or
its stockholders to disclosed at that time. uBid agrees with CCI that it will
use its best efforts to amend or supplement the registration statement, as
required to permit sales of the Registerable Shares covered thereby to resume
within ninety (90) days as promptly as is practicable after it has given the
notice referred to in the preceding sentence. The ninety (90)-day time period
referred to in Subsection 4(a)(ii) hereof during which the registration
statement must be kept current after its effective date shall be extended for an
additional number of Business Days equal to the number of Business Days during
which the rights to sell shares was suspended pursuant to the preceding
sentence, but in no event will uBid be required to update the registration
statement after the date that its obligation to register Registerable Shares
terminates pursuant to Section 8 hereof.
(c) The provisions of Subsections 4(a)(iii), (iv) and (vii) and 4(b)
(except that uBid will have no obligation to amend or supplement the
registration statement), and 4(d) hereof shall also apply to Piggyback
Registrations pursuant to Section 3 hereof.
(d) In connection with each registration hereunder, CCI will (i) furnish
promptly to uBid in writing such information with respect to themselves and the
proposed distribution by CCI as reasonably shall be requested by uBid in order
to assure compliance with federal and applicable state securities laws, and (ii)
comply with all applicable rules promulgated by the SEC or any securities
exchange (including NASDAQ).
(e) Before filing a registration statement covering Registerable Shares, a
prospectus constituting a part thereof or amendments or supplements thereto,
furnish to counsel for CCI included in such registration statement copies of all
such documents proposed to be filed, all of which shall be subject to the
approval of such counsel in the exercise of such counsels' reasonable judgment.
(f) If any registration statement covering Registerable Shares refers to
CCI by name or otherwise as the holder of any securities of uBid, then CCI shall
have the right to require (i) the insertion therein of language, in form and
substance satisfactory to uBid (such satisfaction not to be withheld
unreasonably), to the effect that CCI's holding of Shares is not to be construed
as a recommendation by CCI of the investment quality of the Shares covered
thereby and that such holding does not imply that CCI will assist in meeting any
future financial requirements of uBid, or (ii) in the event that such reference
to CCI by name or otherwise is not in the judgment of uBid, as advised by
counsel, required by the Act or any similar federal statute or any state "blue
sky" or securities law then in force, the deletion of the reference to CCI.
Section 5. Expenses.
--------
(a) All expenses incurred by uBid in complying with Section 2 hereof,
including without limitation all registration and filing fees, printing expense,
fees and disbursements of counsel and independent public accountants for uBid,
fees and expenses (including counsel fees) incurred in connection with complying
with state securities or "blue sky" laws (other than those
7
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which by law must be paid by the selling security holders), fees of securities
exchanges or the National Association of Securities Dealers, Inc., fees of
transfer agents and registrars, but excluding any Selling Expenses, are called
"Registration Expenses." All underwriting discounts, selling commissions and
transfer taxes applicable to the sale of outstanding shares and any legal fees
and expenses of counsel or other advisers and agents of the holders of
Registerable Shares being registered are called "Selling Expenses." CCI will pay
all Registration Expenses and all Selling Expenses.
(b) All expenses incurred by uBid in complying with Section 3 hereof,
including without limitation all registration and filing fees, printing expense,
fees and disbursements of counsel and independent public accountants for uBid,
fees and expenses (including counsel fees) incurred in connection with complying
with state securities or "blue sky" laws (other than those which by law must be
paid by the selling security holders), fees of securities exchanges or the
National Association of Securities Dealers, Inc., fees of transfer agents and
registrars, but excluding any Selling Expenses, are called "Registration
Expenses." All underwriting discounts, selling commissions and transfer taxes
applicable to the sale of outstanding shares and any legal fees and expenses of
counsel or other advisers and agents of the holders of Registerable Shares being
registered are called "Selling Expenses." uBid will pay all Registration
Expenses. All Selling Expenses shall be borne by CCI.
Section 6. Marketing Arrangements
----------------------
(a) Except as otherwise provided in Section 2(d), if (i) CCI requests
registration of Registerable Shares, (ii) the offering proposed to be made is to
be an underwritten public offering, and (iii) the managing underwriter of such
public offering furnishes a written opinion that the total amount of securities
to be included in such offering would exceed the maximum amount of securities
(the "Maximum Amount") (as specified in such opinion) which can be marketed at a
price reasonably related to the then-current market value of such securities (or
the anticipated market price, if no trading market then exists) and without
materially and adversely affecting such offering or the trading market for
Shares, then uBid and CCI shall have a right to participate in such offering in
the following order of priority (a "Priority") until the number of Shares
included in the offering reaches the Maximum Amount, and no additional Shares
will be included in the registration statement:
First Priority shall be to uBid for Shares to be sold for the account of
uBid except to the extent that Shares are registered pursuant to a Registration
Request for Demand Registration pursuant to Section 2 hereof.
Second Priority shall be to CCI pursuant to a Registration Request for
Demand Registration pursuant to Section 2 hereof.
Third Priority shall be to uBid for Shares to be sold for the account of
uBid that do not qualify for First Priority.
Fourth Priority shall be to holders of Shares who have a contractual right
granted to such holders prior to the date hereof to have Shares registered
pursuant to a registration statement initiated on their request or demand on
terms comparable to Section 2 hereof.
8
<PAGE>
Fifth Priority shall be to holders of Shares who have a contractual right
granted to such holder on or prior to the date hereof to have their Shares
registered pursuant to piggyback or incidental rights on terms comparable to
Section 3 hereof (in a registration statement that such holders do not have a
right to initiate), including CCI's Piggyback Rights under this Agreement.
Sixth Priority shall be to all other holders of Shares in any sequence that
may be agreed upon among the holders of such Shares and/or uBid.
To the extent that some but not all of the Shares owned by persons within
any of the Priorities listed above are not included within the Maximum Amount,
the Shares to be included in the registration statement shall be allocated pro
rata to holders in such Priority in proportion to the respective numbers of
Shares each such person in such Priority wishes to include in the registration
statement.
(b) uBid represents and warrants that it has not granted any registration
rights or entered into any agreements obligating it to register any of its
securities under the Act that are inconsistent with the foregoing priorities.
(c) In connection with any underwritten public offering of uBid's equity
securities that is anticipated to commence prior to two (2) years from the date
of the Distribution, CCI agrees that it will agree in writing to any
restrictions on the sale of Registerable Shares owned by CCI that is requested
by the managing underwriter, for a period not to exceed one hundred eighty (180)
days, commencing fifteen (15) days prior to the anticipated commencement date of
the underwritten public offering; provided, however, that such restrictions
shall not relate to Registerable Shares being registered, nor shall such
restrictions be imposed unless restrictions at least as burdensome are imposed
on each executive officer (as defined under the Securities Exchange Act of 1934)
or director of uBid).
(d) uBid agrees that it will not incur any future obligations to register
Shares under the Act that are inconsistent with the Priorities in this Section
6.
Section 7. Exceptions to uBid's Obligations. The right to Demand
--------------------------------
Registration and Piggyback Registration shall not apply if, in the opinion of
counsel for uBid, such registration would jeopardize the tax-free status of the
Distribution. In addition, the right to Piggyback Registration and the
provisions of Subsection 2(c) hereof shall not apply, unless uBid otherwise
agrees in writing, to any registration statement:
(a) To be filed on a registration form which is unavailable for the
registration of Registerable Shares;
(b) Relating primarily to Shares to be offered pursuant to (i) an employee
benefit plan, or (ii) a dividend or interest reinvestment plan (including such a
plan that has an open enrollment or cash investment feature);
(c) Relating to Shares to be issued in the acquisition of another business,
through a merger, consolidation, exchange of securities or otherwise;
9
<PAGE>
(d) Relating to uBid securities to be issued for a consideration other than
solely cash;
(e) Relating to uBid securities to be offered primarily to existing
security holders of uBid, through a "rights offering" or otherwise;
(f) Relating primarily to uBid securities to be issued on the exercise of
options, warrants and similar rights, or on the conversion or exchange of other
securities, issued by uBid or any other person;
(g) Relating primarily to debt securities of uBid, including debt
securities that are convertible or exchangeable for equity securities of uBid;
or
(h) That may become effective automatically upon filing with the SEC
pursuant to Rule 462 under the Act or otherwise.
Section 8. Termination of Registration Rights. Notwithstanding the
----------------------------------
foregoing provisions, uBid's obligation to register Registerable Shares under
this Agreement shall terminate as to any particular Registerable Shares (a) on
the date of the Distribution, (b) when such Registerable Shares have been sold
in an offering registered under the Act or in a sale exempt from registration
under the Act, (c) when such Registerable Shares shall have been effectively
registered under the Act for a period of at least ninety (90) days, or (d) when
a written opinion, to the effect that such Registerable Shares may be sold
without registration under the Act or applicable state law and without
restriction as to the quantity and manner of such sales, shall have been
received from counsel for uBid which counsel is reasonably acceptable to the
owner of such Registerable Shares (which satisfaction shall not be withheld
unreasonably).
Section 9. Indemnification.
---------------
(a) In the event of any registration of Registerable Shares under the Act
pursuant to this Agreement, uBid will, and hereby does, indemnify and hold
harmless, to the fullest extent permitted by law, the seller of any Registerable
Shares covered by such registration statement, each person or entity that
participates as an underwriter or qualified independent underwriter/pricer
("independent underwriter"), if any, in the offering or sale of such securities,
each officer, director or partner of such underwriter or independent
underwriter, and each other person, if any, who controls such seller or any such
underwriter within the meaning of the Act (collectively, the "Indemnified
Persons"), against any and all losses, claims, damages or liabilities, joint or
several, and expenses (including fees of counsel and any amounts paid in any
settlement effected with uBid's consent, which consent shall not be unreasonably
withheld) to which such Indemnified Persons may become subject under the Act,
common law or otherwise, insofar as such losses, claims, damages or liabilities
(or actions or proceedings, whether commenced or threatened, in respect
thereof), or expenses arise out of or are based upon (i) any untrue statement or
alleged untrue statement of a material fact contained in any registration
statement under which Registerable Shares were registered under the Act or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary, final or summary prospectus, together with the documents
incorporated by reference therein (as amended or supplemented if
10
<PAGE>
uBid shall have filed with the SEC any amendment thereof or supplement thereto),
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, or (iii)
any violation by uBid of any federal or state rule or regulation applicable to
uBid and relating to action required of or inaction by uBid in connection with
any such registration. uBid will reimburse Indemnified Persons for any
reasonable legal or any other expenses reasonably incurred by any of them in
connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding. Notwithstanding the foregoing, uBid shall not
be liable to any Indemnified Person to the extent that any such loss, claim,
damage, liability (or action or proceeding, whether commenced or threatened, in
respect thereof) or expense arises out of or is based upon (i) any untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to uBid by or
on behalf of any such Indemnified Person, for use in the preparation of the
registration statement or (ii) the failure of any such Indemnified Person to
comply with any legal requirement applicable to any such Indemnified Person to
deliver a copy of a prospectus or any supplements or amendments thereto after
uBid has made such documents available to such persons, and it is established
that delivery of such prospectus, supplement or amendment would have cured the
defect giving rise to such loss, claim, damage, liability or expense. Such
indemnity and reimbursement of expenses shall remain in full force and effect
following the transfer of Registerable Shares by such seller.
(b) uBid, as a condition to including any Registerable Shares in any
registration statement filed in accordance with this Agreement, shall have
received an undertaking reasonably satisfactory to it from the prospective
seller of such Registerable Shares and any underwriter or independent
underwriter, to indemnify and hold harmless (in the same manner and to the same
extent as set forth in Subsection 9(a)) uBid and its directors and officers and
each person controlling uBid within the meaning of the Act and all other
prospective sellers and their directors, officers, general and limited partners
and respective controlling persons with respect to any statement or alleged
statement in or omission from such registration statement, any preliminary,
final or summary prospectus contained therein, or any amendment or supplement
thereto, if such statement or alleged statement or omission or alleged omission
was made in reliance upon and in conformity with written information furnished
to uBid or its representatives by or on behalf of such seller or underwriter for
use in the preparation of such registration statement; provided, however, that
-------- -------
the aggregate amount which any such seller or prospective seller shall be
required to pay pursuant to such undertaking shall be limited to the amount of
the net proceeds received by such person upon the sale of the Registerable
Shares pursuant to the registration statement giving rise to such claim.
(c) Promptly after receipt by an indemnified party hereunder of written
notice of the commencement of any action or proceeding with respect to which a
claim for indemnification may be made pursuant to this Section 9, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the latter of the commencement of
such action; provided, however, that the failure of any indemnified party to
-------- -------
give notice as provided herein shall not relieve the indemnifying party of its
obligations under this Section 9, except to the extent that the indemnifying
party is actually prejudiced by such failure to give notice. If any such claim
or action shall be brought against an indemnified party, and it shall notify the
indemnifying party thereof, the indemnifying party shall be entitled to
participate therein, and, to the extent that it
11
<PAGE>
wishes, jointly with any other similarly notified indemnifying party, to assume
the defense thereof with counsel reasonably satisfactory to the indemnified
party; and provided, further that the indemnifying party shall not be entitled
-------- -------
to so participate or so assume the defense if, in the indemnified party's
reasonable judgment, a conflict of interest between the indemnified party and
the indemnifying party exists in respect of such claim. After notice from the
indemnifying party to such indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 9 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof unless the indemnifying party has failed to assume the defense of such
claim or to employ counsel reasonably satisfactory to such indemnified party;
and provided, further, that the indemnified parties shall have the right to
-------- -------
employ one counsel to represent such indemnified parties if, in such indemnified
parties' reasonable judgment, a conflict of interest between the indemnified
parties and the indemnifying parties exists in respect of such claim, and in
that event the fees and expenses of such separate counsel shall be paid by the
indemnifying party; and provided, further, that if, in the reasonable judgment
-------- -------
of any of the indemnified parties, a conflict of interest between such
indemnified parties and any other indemnified parties exists in respect of such
claims, such indemnified parties shall be entitled to additional counsel or
counsels and the indemnifying party shall be obligated to pay the fees and
expenses of such additional counsel or counsels. No indemnified party will
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimants or
plaintiffs to such indemnified party of a release from all liability in respect
to such claim or litigation. No indemnifying party will be liable for any
settlement effected without its prior written consent.
(d) If the indemnification provided for in this Section 9 is unavailable or
insufficient to hold harmless an indemnified party under Subsections 9(a) and
(b), then each indemnifying party shall contribute to the amount paid or payable
by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in Subsections 9(a) and (b) in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and the indemnified party on the other hand in connection with statements
or omissions which resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the indemnifying party or the
indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The parties hereto agree that it would not be just and equitable if
contributions pursuant to this Section 9 were to be determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the first sentence of this Section
9. The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities referred to in the first sentence of this Section 9 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any action or
claim (which shall be limited as provided in Subsection 9(c) if the indemnifying
party has assumed the defense of any such action in accordance with the
provisions thereof which is the subject of this Section 9). No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Notwithstanding anything in this Section 9 to the
contrary, no indemnifying party (other than uBid)
12
<PAGE>
shall be required pursuant to this Section 9 to contribute any amount in excess
of the proceeds received by such indemnifying party from the sale of
Registerable Shares in the offering to which the losses, claims, damages or
liabilities of the indemnified parties relate.
(e) The provisions of this Section 9 shall be in addition to any other
rights to indemnification or contribution which any indemnified party may have
pursuant to law or contract and shall remain in full force and effect following
the transfer of the Registerable Shares by any such party.
Section 10. Compliance with Rule 144. At the request of CCI and if CCI
------------------------
proposes to sell Registerable Shares in compliance with Rule 144 under the Act,
or any similar Rule, uBid shall (a) forthwith furnish to CCI a written statement
as to its compliance with the filing requirements of the SEC as set forth in
such Rule and (b) make such additional filings with the SEC as will enable the
Stockholder to make sales of Registerable Shares pursuant to such Rule.
Section 11. Miscellaneous
-------------
(a) Binding and Benefit. This Agreement shall be binding upon and inure to
-------------------
the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns, except that no party may assign or
transfer its rights or obligations under this Agreement without the prior
written consent of the other parties hereto; provided, however, that the
-------- -------
obligation to register Registerable Shares shall be enforceable by direct or
remote transferees of Registerable Shares now owned by CCI only if the transfer
results from the death of any person, a gift made without consideration or the
transfer of all or substantially all of the assets of an entity, by merger,
consolidation, asset sale or otherwise. Without limiting the foregoing, any
transferee of Registerable Shares must agree in writing to be bound by the
provisions of Subsection 6(c) hereof.
13
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
uBid, Inc.
By:
---------------------------------------
Gregory K. Jones
Chairman of the Board,
President and Chief Executive Officer
Creative Computers, Inc.
By:
---------------------------------------
Frank F. Khulusi
Chairman of the Board,
President and Chief Executive Officer
14
<PAGE>
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
-----------------------------
REGISTRATION RIGHTS AGREEMENT, dated as of ______________, 1998, by and
among uBid, Inc., a Delaware corporation ("uBid"), and Frank Khulusi and Sam
Khulusi (referred to individually as a "Stockholder" and collectively as the
"Stockholders").
WHEREAS, uBid is currently a wholly-owned subsidiary of Creative Computers,
Inc., a Delaware corporation ("CCI");
WHEREAS, uBid is considering an initial public offering of its Common Stock
("IPO");
WHEREAS, after the IPO, CCI will own approximately 80.1% of the outstanding
shares of uBid's Common Stock (the "Retained Shares");
WHEREAS, subject to the conditions set forth in the Separation and
Distribution Agreement, dated as of _________________, 1998, by and between CCI
and uBid, CCI will distribute to its stockholders, not earlier than six months
following the IPO, all of the Retained Shares in a tax-free distribution (the
"Distribution");
WHEREAS, the Stockholders currently collectively own approximately
______________, or [40%], of the outstanding shares of the Common Stock of CCI
and, accordingly, based on that ownership, would be entitled to receive
approximately [40%] of the Retained Shares in the Distribution; and
WHEREAS, uBid and the Stockholders desire to establish terms and conditions
for the registration for public resale after the Distribution of the
Stockholders' Retained Shares.
NOW, THEREFORE, in consideration of the premises and mutual promises and
representations contained herein, and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the parties hereto do mutually
covenant, stipulate and agree as follows:
Section 1. Definitions.
-----------
The following terms shall have the following meanings unless the context
otherwise indicates:
"Act" means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
"Business Day" means a day on which the New York Stock Exchange is open for
business.
"Demand Registration" means registration under the Act pursuant to a
Registration Request given under Section 2 hereof.
"Indemnified Persons" shall have the meaning given in Section 9 hereof.
"NASDAQ" means the Nasdaq National Market of The Nasdaq Stock Market.
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<PAGE>
"Piggyback Registration" means registration under the Act pursuant to
Section 3 hereof.
"Piggyback Request" means a written request to uBid pursuant to Section 3
hereof for the registration of Registerable Shares pursuant to the Act.
"Priority" shall have the meaning given in Section 6 hereof.
"Registration Expenses" shall have the meaning given in Section 5 hereof.
"Registration Request" means a written request to uBid pursuant to Section
2 hereof for Demand Registration of Registerable Shares pursuant to the Act.
"Registerable Shares" means the approximately [2,876,524] Shares covered by
this Agreement which will be owned by the Stockholders after the Distribution,
such number to be equitably adjusted in the event of a stock split, stock
dividend, combination or reclassification of Shares.
"Selling Expenses" shall have the meaning given in Section 5 hereof.
"Stockholder" shall have the meaning given in the heading of this
Agreement.
"Shares" means shares of the Common Stock, $.001 par value, of uBid.
"SEC" means the Securities and Exchange Commission.
Section 2. Demand Registration.
-------------------
(a) At any time at least one hundred eighty (180) days following the
Distribution, either of the Stockholders may, submit a Registration Request for
Demand Registration covering all or part of his Registerable Shares, which
request must request registration of at least the Minimum Amount. The
Registration Request shall state the number of Registerable Shares to be
registered and the intended plan of distribution thereof. uBid shall be
obligated to register Registerable Shares pursuant to this Section 2 on a total
of only two (2) occasions. A request withdrawn pursuant to Subsection 2(c)
hereof or deemed to be a Piggyback Registration pursuant to Subsection 2(d)
hereof shall be ignored for this purpose. uBid shall be deemed to have
satisfied its obligation under this Section 2 with respect to a Registration
Request if a registration statement filed pursuant to a Registration Request
becomes effective under the Act and remains effective for the period required
hereby, or if the failure of such a registration statement to become or remain
effective results primarily from any action or inaction of either or both of the
Stockholders.
Subject to the conditions and limitations of Section 4 hereof, uBid will
use its best efforts to file a registration statement under the Act registering
the Registerable Shares covered by a Registration Request within forty-five (45)
days after it receives such Registration Request unless such Registration
Request is withdrawn as permitted by Subsection 2(c) hereof.
(b) The right to Demand Registration is subject to the procedures in
Section 4 hereof and the following additional conditions and limitations:
2
<PAGE>
(i) Any individual Stockholder joining a Registration Request may
withdraw such Stockholder's Registerable Shares from the Registration Request at
any time prior to the time the registration statement becomes effective,
provided that uBid may ignore a notice of withdrawal made within 24 hours of the
time the registration statement becomes effective. Following such a withdrawal,
uBid shall not take any further action to register the withdrawn Registerable
Shares, and shall not be obligated to register any Registerable Shares if the
number of non-withdrawn Registerable Shares is less than the Minimum Amount.
However, except as otherwise provided in Subsection 2(c) or (d) hereof, a
Registration Request, once made, shall count as having been made for purposes of
Subsection 2(a), unless it is withdrawn by all Stockholders making such request
within fifteen (15) days after having been made or it is withdrawn before uBid
devotes any significant efforts to the preparation of the registration
statement.
(ii) Unless otherwise agreed to by uBid, any Demand Registration must
relate to a firm commitment underwriting for which the managing underwriter
shall be reasonably satisfactory to uBid (such satisfaction not to be withheld
unreasonably) or a non-underwritten offering on a "shelf" basis in accordance
with Rule 415 under the Act.
(iii) uBid shall be permitted to use any registration form available
to it for the registration of Registerable Shares, and shall not be obligated to
include in the prospectus any information that may be incorporated by reference
or that is not required to be included therein by the applicable registration
form.
(iv) No Registration Request may be made by a Stockholder if the
amount of shares proposed to be sold could be sold by such Stockholder without
limitation under Rule 144 under the Act.
(c) Notwithstanding the foregoing, if uBid is aware at the time it
receives a Registration Request that a registered public sale of Shares is being
contemplated or is in the process of being prepared (except as provided in
Section 7 hereof), it will notify the Stockholders of the relevant facts, and
any Stockholder who joined such Registration Request shall have the right to
withdraw the request by written notice given to uBid within ten (10) days after
uBid's notice under this Subsection 2(c), in which case such Registration
Request will be deemed not to have been made for purposes of Subsection 2(a).
(d) For an additional ninety (90) days following the date on which the
Stockholders may first submit a Registration Request for Demand Registration,
uBid will be entitled to include Shares in any Demand Registration and to reduce
the number of Shares to be sold by the Stockholders thereunder to a minimum of
20%, collectively, of the total offering plus any underwriters' over-allotment
option. If, as a result of this cutback procedure, the number of Shares sold
by uBid in such offering constitutes more than one-half of the total shares sold
in the offering, the registration would be treated as a Piggyback Registration
under Section 3 below, and a Registration Request will be deemed not to have
been made for purposes of Subsection 2(a) hereof.
Section 3. Piggyback Registration. If at any time following the
----------------------
Distribution uBid proposes to register any Shares under the Act for sale to the
public by uBid or any other person (except as provided in Section 7 hereof),
uBid shall, not less than fifteen (15) days prior to the proposed date of filing
of a registration statement under the Act, give written notice to the
3
<PAGE>
Stockholders of its intention to do so. A Piggyback Request from any such
Stockholder shall state the number of Registerable Shares to be registered and
the intended plan of distribution thereof. If uBid receives a Piggyback Request
from any Stockholder given within fifteen (15) days after uBid's notice under
this Section 3, uBid, subject to the conditions and limitations of Section 4
hereof, will use its best efforts to cause the Registerable Shares covered by
Piggyback Request to be so registered under the Act in the proposed registration
statement if the proposed registration statement becomes effective, but uBid
shall have no obligation to cause, or use any efforts to cause, any such
registration statement to become effective. Registerable Shares covered by a
Piggyback Request shall be sold pursuant to the same plan of distribution that
applies to the majority of the other Shares covered by such registration
statement, except to the extent that uBid otherwise agrees in writing. The
rights to Piggyback Registration granted by this Section 3 may be exercised an
unlimited number of occasions following the Distribution. No Piggyback Request
may be made by a Stockholder if the amount of Shares proposed to be sold could
be sold by such Stockholder without limitation under Rule 144 under the Act.
Section 4. Registration Procedures.
-----------------------
(a) If uBid is required by the provisions of Section 2 to effect Demand
Registration of any Registerable Shares, uBid will promptly:
(i) To the extent required by Section 2, prepare and file with the
SEC a registration statement (which shall be on Form S-3, unless uBid does not
qualify for use of Form S-3 in such registration, in which case such
registration statement shall be on any other available form selected by uBid)
with respect to such Registerable Shares and thereafter use its best efforts to
cause such registration statement to become effective promptly.
(ii) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective for the period
of ninety (90) days (excluding any days during which the right to sell shares is
suspended pursuant to Subsection 4(b) hereof) or such lesser period as may be
necessary to comply with the provisions of the Act with respect to the
disposition of all Registerable Shares covered by such registration statement in
accordance with the plan of distribution set forth in such registration
statement;
(iii) Comply with Rule 424 under the Act relating to filing of
prospectuses and furnish to each seller and to each underwriter such number of
copies of the registration statement and the prospectus included therein
(including each preliminary prospectus) as such persons reasonably may request
in order to facilitate the public sale of the Registerable Shares covered by
such registration statement;
(iv) If the offering is to be underwritten, uBid and the
Stockholders shall enter into a written agreement with any managing underwriter
selected in the manner herein provided in such form and containing such
provisions as are satisfactory to uBid and the Stockholders (such satisfaction
not to be withheld unreasonably), and as are customary in the securities
business for such an arrangement between such underwriter, such seller and
corporations of uBid's size and investment stature and uBid shall take such
other actions as the Stockholders shall reasonably request in order to expedite
or facilitate the disposition of such Registerable Shares;
4
<PAGE>
(v) Furnish, at the request of the Stockholders, on the date that
the underwriting agreement is signed and on the date that Registerable Shares
are delivered to the underwriters for sale pursuant to such registration: (A) an
opinion of counsel representing uBid for the purposes of such registration,
dated such dates, respectively, addressed to the underwriters and to the
Stockholders, stating that such registration statement has become effective
under the Act and that (I) to the best knowledge of such counsel, no stop order
suspending the effectiveness thereof has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated under the Act, and
(II) the registration statement, the related prospectus and each amendment or
supplement thereof comply as to form in all material respects with the
requirements of the Act (except that such counsel need not express any opinion
as to the financial statements or any other financial statements, notes thereto
and related schedules and other financial and statistical data contained or
incorporated by reference therein, and (III) to such other effects as reasonably
may be requested by counsel for the underwriters or by either of the
Stockholders or their respective counsel, and (B) a "comfort letter" in
customary form dated such dates from the independent public accountants retained
by uBid, addressed to the underwriters and to the Stockholders, stating that
they are independent public accountants within the meaning of the Act and that,
in the opinion of such accountants, the financial statements of uBid included or
incorporated by reference in the registration statement or the prospectus, or
any amendment or supplement thereof, comply as to form in all material respects
with the applicable accounting requirements of the Act, and such letter shall
additionally cover such other financial matters as are customary to cover in
such a letter (including information as to the period ending no more than five
business days prior to the date of such letter) with respect to the registration
statement in respect of which such letter is being given as such underwriters
reasonably may request;
(vi) Upon receipt of such confidentiality agreements as uBid may
reasonably request, make available for inspection by the Stockholders, any
underwriter participating in any distribution pursuant to such registration
statement, and any attorney, accountant or other agent retained by either of the
Stockholders or underwriter, all financial and other records, pertinent
corporate documents and properties of uBid, and cause uBid officers, directors
and employees to supply all information reasonably requested by either of the
Stockholders, underwriter, attorney, accountant or agent in connection with such
registration statement, in each case in order to confirm disclosures contained
in the registration statement or incorporated therein by reference;
(vii) Give the Stockholders two (2) days' advance notice of its
anticipated filing date of the registration statement and amendments thereto;
(viii) Use its best efforts to cause the Registerable Shares covered
by such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the
Stockholders thereof to consummate the disposition of such Registerable Shares;
(ix) Comply with all applicable rules and regulations of the SEC,
and make generally available to its security holders, as soon as reasonably
practicable no later than the date the Form 10-Q or Form 10-K, as the case may
be, covering the fourth fiscal quarter of uBid commencing after the effective
date of the registration statement, is required to be filed with the SEC, an
earnings statement covering the period of at least twelve (12) consecutive
months beginning with the first day of uBid's first calendar quarter commencing
after the effective date of
5
<PAGE>
the registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Act and Rule 158 thereunder;
(x) Provide a transfer agent and registrar, which may be the same
entity as the transfer agent, for all the Registerable Shares covered by such
registration statement not later than the effective date of such registration
statement;
(xi) Permit any Stockholder who, in the sole judgment of such
Stockholder, exercised in good faith, might be deemed to be a controlling person
of uBid, to participate through counsel reasonably acceptable to uBid in the
preparation of such registration statement and, if specifically requested by
such counsel, in discussions between uBid and the SEC or its staff with respect
to such registration statement, and to include in such registration statement
material, furnished to uBid in writing, which in the written opinion of such
counsel is necessary to include in order to avoid potential liability for such
Stockholder;
(xii) Use its best efforts to cause all such Registerable Shares
covered by such registration statement to be listed or quoted on the principal
securities exchange (including NASDAQ) on which similar securities issued by
uBid are then listed or quoted, if the listing or quoting of such Registerable
Shares is then permitted under the rules of such exchange;
(xiii) If there is a stop order relating to or suspension of the
effectiveness of the registration statement, use its best efforts to have the
stop order or suspension of effectiveness withdrawn as promptly as practicable;
(xiv) Use its best efforts to comply with all applicable rules and
regulations of the SEC, and make generally available to its security holders an
earnings statement satisfying the provisions of Section 11(a) of the Act, no
later than forty-five (45) days after the end of any twelve-month period (or
ninety (90) days, if such period is a fiscal year) (A) commencing at the end of
any fiscal quarter in which the Registerable Shares are sold to underwriters in
a firm or best efforts underwritten offering, or (B) if not sold to underwriters
in such an offering, beginning with the first month of the first fiscal quarter
of uBid commencing after the effective date of the registration statement, which
statements shall cover such twelve-month period; and
(xv) Use its best efforts to register or qualify the Registerable
Shares covered by such registration statement under the securities or blue sky
laws of such jurisdictions as the sellers of Registerable Shares or the managing
underwriter reasonably shall request; provided, however, that uBid shall not for
any such purpose be required to qualify generally to transact business as a
foreign corporation in any jurisdiction where it is not so qualified or to
consent to general service of process or taxation in any such jurisdiction.
(b) Notwithstanding the foregoing, uBid may delay filing a registration
statement otherwise required to be filed pursuant to this Agreement, and may
withhold efforts to cause a registration statement covering Registerable Shares
to become effective for a period of up to ninety (90) days, if uBid determines
in good faith that such registration statement might (1) interfere with or
affect the negotiation or completion of any transaction that is being
contemplated by uBid (whether or not a final decision has been made to undertake
such transaction) at the time the right to delay is exercised, or (2) involve
initial or continuing disclosure obligations that might not be in the
6
<PAGE>
best interest of uBid's stockholders. If, after a registration statement becomes
effective, uBid notifies the holders of Registerable Shares covered by such
registration statement that uBid considers it appropriate for the registration
statement to be amended or supplemented, the holders of such Registerable Shares
shall suspend any further sales of their Registerable Shares until uBid advises
them that the registration statement has been amended or supplemented. uBid may
give such advice if there exists at any time material non-public information
relating to uBid that, in the reasonable opinion of uBid's Board of Directors,
would be prejudicial to uBid or its stockholders to disclosed at that time. uBid
agrees with the Stockholders that it will use its best efforts to amend or
supplement the registration statement, as required to permit sales of the
Registerable Shares covered thereby to resume within ninety (90) days as
promptly as is practicable after it has given the notice referred to in the
preceding sentence. The ninety (90)-day time period referred to in Subsection
4(a)(ii) hereof during which the registration statement must be kept current
after its effective date shall be extended for an additional number of Business
Days equal to the number of Business Days during which the rights to sell shares
was suspended pursuant to the preceding sentence, but in no event will uBid be
required to update the registration statement after the date that its obligation
to register Registerable Shares terminates pursuant to Section 8 hereof.
(c) The provisions of Subsections 4(a)(iii), (iv) and (vii) and 4(b)
(except that uBid will have no obligation to amend or supplement the
registration statement), and 4(d) hereof shall also apply to Piggyback
Registrations pursuant to Section 3 hereof.
(d) In connection with each registration hereunder, each Stockholder will
(i) furnish promptly to uBid in writing such information with respect to
themselves and the proposed distribution by each Stockholder as reasonably shall
be requested by uBid in order to assure compliance with federal and applicable
state securities laws, and (ii) comply with all applicable rules promulgated by
the SEC or any securities exchange (including NASDAQ).
(e) Before filing a registration statement covering Registerable Shares, a
prospectus constituting a part thereof or amendments or supplements thereto,
furnish to counsel for each of the Stockholders included in such registration
statement copies of all such documents proposed to be filed, all of which shall
be subject to the approval of such counsel in the exercise of such counsels'
reasonable judgment.
(f) If any registration statement covering Registerable Shares refers to
any Stockholder by name or otherwise as the holder of any securities of uBid,
then such Stockholder shall have the right to require (i) the insertion therein
of language, in form and substance satisfactory to uBid (such satisfaction not
to be withheld unreasonably), to the effect that such Stockholder's holding of
Shares is not to be construed as a recommendation by such Stockholder of the
investment quality of the Shares covered thereby and that such holding does not
imply that such Stockholder will assist in meeting any future financial
requirements of uBid, or (ii) in the event that such reference to such
Stockholder by name or otherwise is not in the judgment of uBid, as advised by
counsel, required by the Act or any similar federal statute or any state "blue
sky" or securities law then in force, the deletion of the reference to such
Stockholder.
Section 5. Expenses.
--------
7
<PAGE>
(a) All expenses incurred by uBid in complying with Section 2 hereof,
including without limitation all registration and filing fees, printing expense,
fees and disbursements of counsel and independent public accountants for uBid,
fees and expenses (including counsel fees) incurred in connection with complying
with state securities or "blue sky" laws (other than those which by law must be
paid by the selling security holders), fees of securities exchanges or the
National Association of Securities Dealers, Inc., fees of transfer agents and
registrars, but excluding any Selling Expenses, are called "Registration
Expenses." All underwriting discounts, selling commissions and transfer taxes
applicable to the sale of outstanding shares and any legal fees and expenses of
counsel or other advisers and agents of the holders of Registerable Shares being
registered are called "Selling Expenses." uBid will pay all Registration
Expenses, to a maximum of $100,000.00 for the first Demand Registration and a
maximum of $50,000.00 for the second Demand Registration. All Selling Expenses
shall be borne by the participating sellers, in proportion to the number of
Registerable Shares sold by each unless they otherwise agree among themselves.
(b) All expenses incurred by uBid in complying with Section 3 hereof,
including without limitation all registration and filing fees, printing expense,
fees and disbursements of counsel and independent public accountants for uBid,
fees and expenses (including counsel fees) incurred in connection with complying
with state securities or "blue sky" laws (other than those which by law must be
paid by the selling security holders), fees of securities exchanges or the
National Association of Securities Dealers, Inc., fees of transfer agents and
registrars, but excluding any Selling Expenses, are called "Registration
Expenses." All underwriting discounts, selling commissions and transfer taxes
applicable to the sale of outstanding shares and any legal fees and expenses of
counsel or other advisers and agents of the holders of Registerable Shares being
registered are called "Selling Expenses." uBid will pay all Registration
Expenses. All Selling Expenses shall be borne by the participating sellers, in
proportion to the number of Registerable Shares sold by each unless they
otherwise agree among themselves.
Section 6. Marketing Arrangements
----------------------
(a) Except as otherwise provided in Section 2(d), (i) any Stockholder
requests registration of Registerable Shares, (ii) the offering proposed to be
made is to be an underwritten public offering, and (iii) the managing
underwriter of such public offering furnishes a written opinion that the total
amount of securities to be included in such offering would exceed the maximum
amount of securities (the "Maximum Amount") (as specified in such opinion) which
can be marketed at a price reasonably related to the then-current market value
of such securities (or the anticipated market price, if no trading market then
exists) and without materially and adversely affecting such offering or the
trading market for Shares, then uBid and each Stockholder desiring to register
his Shares by such registration shall have a right to participate in such
offering in the following order of priority (a "Priority") until the number of
Shares included in the offering reaches the Maximum Amount, and no additional
Shares will be included in the registration statement:
First Priority shall be to uBid for Shares to be sold for the account of
uBid except to the extent that Shares (i) are registered pursuant to a
Registration Request for Demand Registration pursuant to Section 2 hereof and
(ii) do not qualify for the priority provisions of Section 2(d).
8
<PAGE>
Second Priority shall be to a Stockholder who has made a Registration
Request for Demand Registration pursuant to Section 2 hereof (subject to the
cutback provisions of Section 2(d)).
Third Priority shall be to uBid for Shares to be sold for the account of
uBid that do not qualify for First Priority.
Fourth Priority shall be to holders of Shares who have a contractual right
granted to such holders prior to the date hereof to have Shares registered
pursuant to a registration statement initiated on their request or demand on
terms comparable to Section 2 hereof.
Fifth Priority shall be to holders of Shares who have a contractual right
granted to such holder on or prior to the date hereof to have their Shares
registered pursuant to piggyback or incidental rights on terms comparable to
Section 3 hereof (in a registration statement that such holders do not have a
right to initiate), including Stockholders who have Piggyback Rights under this
Agreement.
Sixth Priority shall be to all other holders of Shares in any sequence that
may be agreed upon among the holders of such Shares and/or uBid.
To the extent that some but not all of the Shares owned by persons within
any of the Priorities listed above are not included within the Maximum Amount,
the Shares to be included in the registration statement shall be allocated pro
rata to holders in such Priority in proportion to the respective numbers of
Shares each such person in such Priority wishes to include in the registration
statement.
(b) uBid represents and warrants that it has not granted any registration
rights or entered into any agreements obligating it to register any of its
securities under the Act that are inconsistent with the foregoing priorities.
(c) In connection with any underwritten public offering of uBid's equity
securities that is anticipated to commence prior to two (2) years from the date
of the Distribution, each Stockholder agrees that such Stockholder will agree in
writing to any restrictions on the sale of Registerable Shares owned by such
Stockholder that is requested by the managing underwriter, for a period not to
exceed one hundred eighty (180) days, commencing fifteen (15) days prior to the
anticipated commencement date of the underwritten public offering; provided,
however, that such restrictions shall not relate to Registerable Shares being
registered, nor shall such restrictions be imposed unless restrictions at least
as burdensome are imposed on each executive officer (as defined under the
Securities Exchange Act of 1934) or director of uBid).
(d) uBid agrees that it will not incur any future obligations to register
Shares under the Act that are inconsistent with the Priorities in this Section
6.
Section 7. Exceptions to uBid's Obligations. The right to Demand
--------------------------------
Registration and Piggyback Registration shall not apply if, in the opinion of
counsel for uBid, such registration would jeopardize the tax-free status of the
Distribution. In addition, the right to Piggyback Registration and the
provisions of Subsection 2(c) hereof shall not apply, unless uBid otherwise
agrees in writing, to any registration statement:
9
<PAGE>
(a) To be filed on a registration form which is unavailable for the
registration of Registerable Shares;
(b) Relating primarily to Shares to be offered pursuant to (i) an employee
benefit plan, or (ii) a dividend or interest reinvestment plan (including such a
plan that has an open enrollment or cash investment feature);
(c) Relating to Shares to be issued in the acquisition of another
business, through a merger, consolidation, exchange of securities or otherwise;
(d) Relating to uBid securities to be issued for a consideration other
than solely cash;
(e) Relating to uBid securities to be offered primarily to existing
security holders of uBid, through a "rights offering" or otherwise;
(f) Relating primarily to uBid securities to be issued on the exercise of
options, warrants and similar rights, or on the conversion or exchange of other
securities, issued by uBid or any other person;
(g) Relating primarily to debt securities of uBid, including debt
securities that are convertible or exchangeable for equity securities of uBid;
or
(h) That may become effective automatically upon filing with the SEC
pursuant to Rule 462 under the Act or otherwise.
Section 8. Termination of Registration Rights. Notwithstanding the
----------------------------------
foregoing provisions, uBid's obligation to register Registerable Shares under
this Agreement shall terminate as to any particular Registerable Shares (a) on
the fifth anniversary date of the Distribution, (b) when such Registerable
Shares have been sold in an offering registered under the Act or in a sale
exempt from registration under the Act, (c) when such Registerable Shares shall
have been effectively registered under the Act for a period of at least ninety
(90) days, or (d) when a written opinion, to the effect that such Registerable
Shares may be sold without registration under the Act or applicable state law
and without restriction as to the quantity and manner of such sales, shall have
been received from counsel for uBid which counsel is reasonably acceptable to
the owner of such Registerable Shares (which satisfaction shall not be withheld
unreasonably).
Section 9. Indemnification.
---------------
(a) In the event of any registration of Registerable Shares under the Act
pursuant to this Agreement, uBid will, and hereby does, indemnify and hold
harmless, to the fullest extent permitted by law, the seller of any Registerable
Shares covered by such registration statement, each person or entity that
participates as an underwriter or qualified independent underwriter/pricer
("independent underwriter"), if any, in the offering or sale of such securities,
each officer, director or partner of such underwriter or independent
underwriter, and each other person, if any, who controls such seller or any such
underwriter within the meaning of the Act (collectively, the "Indemnified
Persons"), against any and all losses, claims, damages or liabilities, joint or
several, and expenses (including fees of counsel and any amounts paid in any
settlement effected with
10
<PAGE>
uBid's consent, which consent shall not be unreasonably withheld) to which such
Indemnified Persons may become subject under the Act, common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof), or expenses
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of a material fact contained in any registration statement under which
Registerable Shares were registered under the Act or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, (ii) any untrue statement or alleged
untrue statement of a material fact contained in any preliminary, final or
summary prospectus, together with the documents incorporated by reference
therein (as amended or supplemented if uBid shall have filed with the SEC any
amendment thereof or supplement thereto), or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or (iii) any violation by uBid of any
federal or state rule or regulation applicable to uBid and relating to action
required of or inaction by uBid in connection with any such registration. uBid
will reimburse Indemnified Persons for any reasonable legal or any other
expenses reasonably incurred by any of them in connection with investigating or
defending any such loss, claim, damage, liability, action or proceeding.
Notwithstanding the foregoing, uBid shall not be liable to any Indemnified
Person to the extent that any such loss, claim, damage, liability (or action or
proceeding, whether commenced or threatened, in respect thereof) or expense
arises out of or is based upon (i) any untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to uBid by or on behalf of any
such Indemnified Person, for use in the preparation of the registration
statement or (ii) the failure of any such Indemnified Person to comply with any
legal requirement applicable to any such Indemnified Person to deliver a copy of
a prospectus or any supplements or amendments thereto after uBid has made such
documents available to such persons, and it is established that delivery of such
prospectus, supplement or amendment would have cured the defect giving rise to
such loss, claim, damage, liability or expense. Such indemnity and reimbursement
of expenses shall remain in full force and effect following the transfer of
Registerable Shares by such seller.
(b) uBid, as a condition to including any Registerable Shares in any
registration statement filed in accordance with this Agreement, shall have
received an undertaking reasonably satisfactory to it from the prospective
seller of such Registerable Shares and any underwriter or independent
underwriter, to indemnify and hold harmless (in the same manner and to the same
extent as set forth in Subsection 9(a)) uBid and its directors and officers and
each person controlling uBid within the meaning of the Act and all other
prospective sellers and their directors, officers, general and limited partners
and respective controlling persons with respect to any statement or alleged
statement in or omission from such registration statement, any preliminary,
final or summary prospectus contained therein, or any amendment or supplement
thereto, if such statement or alleged statement or omission or alleged omission
was made in reliance upon and in conformity with written information furnished
to uBid or its representatives by or on behalf of such seller or underwriter for
use in the preparation of such registration statement; provided, however, that
-------- -------
the aggregate amount which any such seller or prospective seller shall be
required to pay pursuant to such undertaking shall be limited to the amount of
the net proceeds received by such person upon the sale of the Registerable
Shares pursuant to the registration statement giving rise to such claim.
11
<PAGE>
(c) Promptly after receipt by an indemnified party hereunder of written
notice of the commencement of any action or proceeding with respect to which a
claim for indemnification may be made pursuant to this Section 9, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the latter of the commencement of
such action; provided, however, that the failure of any indemnified party to
-------- -------
give notice as provided herein shall not relieve the indemnifying party of its
obligations under this Section 9, except to the extent that the indemnifying
party is actually prejudiced by such failure to give notice. If any such claim
or action shall be brought against an indemnified party, and it shall notify the
indemnifying party thereof, the indemnifying party shall be entitled to
participate therein, and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party; and provided, further,
-------- -------
that the indemnifying party shall not be entitled to so participate or so assume
the defense if, in the indemnified party's reasonable judgment, a conflict of
interest between the indemnified party and the indemnifying party exists in
respect of such claim. After notice from the indemnifying party to such
indemnified party of its election to assume the defense of such claim or action,
the indemnifying party shall not be liable to the indemnified party under this
Section 9 for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof unless the indemnifying
party has failed to assume the defense of such claim or to employ counsel
reasonably satisfactory to such indemnified party; and provided, further, that
-------- -------
the indemnified parties shall have the right to employ one counsel to represent
such indemnified parties if, in such indemnified parties' reasonable judgment, a
conflict of interest between the indemnified parties and the indemnifying
parties exists in respect of such claim, and in that event the fees and expenses
of such separate counsel shall be paid by the indemnifying party; and provided,
--------
further, that if, in the reasonable judgment of any of the indemnified parties,
- -------
a conflict of interest between such indemnified parties and any other
indemnified parties exists in respect of such claims, such indemnified parties
shall be entitled to additional counsel or counsels and the indemnifying party
shall be obligated to pay the fees and expenses of such additional counsel or
counsels. No indemnified party will consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimants or plaintiffs to such indemnified party of a release
from all liability in respect to such claim or litigation. No indemnifying
party will be liable for any settlement effected without its prior written
consent.
(d) If the indemnification provided for in this Section 9 is unavailable or
insufficient to hold harmless an indemnified party under Subsections 9(a) and
(b), then each indemnifying party shall contribute to the amount paid or payable
by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in Subsections 9(a) and (b) in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and the indemnified party on the other hand in connection with statements
or omissions which resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the indemnifying party or the
indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The parties hereto agree that it would not be just and equitable if
contributions pursuant to this Section 9 were to be determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to
12
<PAGE>
in the first sentence of this Section 9. The amount paid by an indemnified party
as a result of the losses, claims, damages or liabilities referred to in the
first sentence of this Section 9 shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim (which shall be limited as
provided in Subsection 9(c) if the indemnifying party has assumed the defense of
any such action in accordance with the provisions thereof which is the subject
of this Section 9). No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
anything in this Section 9 to the contrary, no indemnifying party (other than
uBid) shall be required pursuant to this Section 9 to contribute any amount in
excess of the proceeds received by such indemnifying party from the sale of
Registerable Shares in the offering to which the losses, claims, damages or
liabilities of the indemnified parties relate.
(e) The provisions of this Section 9 shall be in addition to any other
rights to indemnification or contribution which any indemnified party may have
pursuant to law or contract and shall remain in full force and effect following
the transfer of the Registerable Shares by any such party.
Section 10. Compliance with Rule 144. At the request of either of the
------------------------
Stockholders who proposes to sell Registerable Shares in compliance with Rule
144 under the Act, or any similar Rule, uBid shall (a) forthwith furnish to such
Stockholder a written statement as to its compliance with the filing
requirements of the SEC as set forth in such Rule and (b) make such additional
filings with the SEC as will enable the Stockholder to make sales of
Registerable Shares pursuant to such Rule.
Section 11. Miscellaneous
-------------
(a) Binding and Benefit. This Agreement shall be binding upon and inure to
-------------------
the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns, except that no party may assign or
transfer its rights or obligations under this Agreement without the prior
written consent of the other parties hereto; provided, however, that the
-------- -------
obligation to register Registerable Shares shall be enforceable by direct or
remote transferees of Registerable Shares now owned by the Stockholders only if
the transfer results from the death of any person, a gift made without
consideration or the transfer of all or substantially all of the assets of an
entity, by merger, consolidation, asset sale or otherwise. Without limiting the
foregoing, any transferee of Registerable Shares must agree in writing to be
bound by the provisions of Subsection 6(c) hereof.
(b) Communications from Stockholders. If Shares are owned of record
--------------------------------
jointly by two or more persons, uBid may rely on any communication signed by one
such person. uBid may ignore communications given by persons who purport to own
Registerable Shares beneficially unless such communications are confirmed by a
record owner, and it may ignore any communications from a record owner that
conflict with previously received communications from another person who is at
the relevant time also a record owner of the same Registerable Shares.
13
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
uBid, Inc.
By:_____________________________________
Gregory K. Jones
President and Chief Executive Officer
Stockholders:
________________________________________
Frank F. Khulusi
________________________________________
Sam U. Khulusi
14
<PAGE>
EXHIBIT 10.2
SERVICES AGREEMENT
SERVICES AGREEMENT, dated as of ________, 1998 (this "Agreement") by and
between Creative Computers, Inc., a Delaware corporation ("CCI"), and uBid,
Inc., a Delaware corporation ("uBid").
WHEREAS, uBid is currently a wholly-owned subsidiary of CCI and obtains
administrative and other services from CCI;
WHEREAS, uBid is considering an initial public offering of its Common Stock
("IPO");
WHEREAS, after the IPO, CCI will own approximately 80.1% of the outstanding
shares of uBid's Common Stock (the "Retained Shares");
WHEREAS, subject to the conditions set forth in the Separation and
Distribution Agreement, dated as of _________________, 1998, by and between CCI
and uBid, CCI will distribute to its stockholders, not earlier than six months
following the IPO, all of the Retained Shares in a tax-free distribution (the
"Distribution"); and
WHEREAS, after the IPO, uBid desires to continue to obtain administrative
and other services from CCI and CCI desires to continue to provide such services
for a period of up to one year following the closing date of the IPO.
NOW, THEREFORE, in consideration of the premises and mutual promises and
representations contained herein, and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the parties hereto do mutually
covenant, stipulate and agree as follows:
Section 1. Services.
--------
(a) CCI shall render to uBid general accounting services, credit
services and payroll and benefits administration services all as more
particularly described in Exhibit 1 hereto (collectively, the "Services"), in
---------
conformity with good commercial practice, the terms and conditions of this
Agreement and the reasonable instructions of uBid in accordance with this
Agreement.
(b) uBid shall provide to CCI when required all funds necessary to
perform the Services, including, without limitation, all amounts required to pay
payroll expenses of employees of uBid and all amounts necessary to pay accounts
payable of uBid.
(c) CCI shall have no authority pursuant to this Agreement to
commit uBid in any manner whatsoever, to use uBid's name in any way or to enter
into any contracts on behalf of uBid.
(d) In the event that uBid requires services which exceed the scope
or extent of the Services provided for herein, and if CCI agrees to provide such
services, CCI and uBid shall negotiate in good faith an adjustment to the fee
payable hereunder; provided, however, that
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<PAGE>
the fee payable by uBid for such services shall be no less favorable to uBid
that the charges for comparable services from unaffiliated third parties.
Section 2. Compensation.
------------
(a) uBid shall pay to CCI a fee for each of the Services equal to
the amount listed in Exhibit 1 corresponding to such service, provided that in
---------
the event uBid terminates any Service in accordance with Section 3 hereof, the
fee for such Service shall no longer be payable following the effective date of
such termination.
(b) On the last day of each month CCI shall submit to uBid for
payment a billing invoice setting forth the amount of fees payable by uBid to
CCI for Services rendered. uBid shall pay the invoiced amount to CCI within
thirty (30) days after the date on which such invoice is received by uBid.
Section 3. Term.
----
The initial term of this Agreement shall commence on the date hereof
and shall continue for a period of one (1) year unless renewed or extended by
mutual agreement of the parties; provided, however, that the Agreement may be
-------- -------
terminated at any time at the option of either CCI or uBid upon ninety (90) days
prior written notice. Specific categories of Services may be cancelled as set
forth in Exhibit 1.
---------
Section 4. Records and Accounts.
--------------------
CCI shall maintain accurate records and accounts of all transactions
relating to the Services performed by it pursuant to this Agreement. Such
records and accounts shall be maintained separately from CCI's own records and
accounts and shall reflect such information as would normally be examined by an
independent accountant in performing a complete audit pursuant to United States
generally accepted auditing standards for the purpose of certifying financial
statements, and to permit verification thereof by governmental agencies. uBid
shall have the right to inspect and copy, upon reasonable notice and at
reasonable intervals during CCI's regular office hours, the separate records and
accounts maintained by CCI relating to the Services.
Section 5. Directors and Officers of uBid and CCI.
--------------------------------------
(a) Nothing contained in this Agreement shall be deemed to relieve
the officers and directors of uBid from the performance of their duties or limit
the exercise of their powers in accordance with uBid's Certificate of
Incorporation or the laws of the State of Delaware. The services of CCI's
officers and employees which are rendered to uBid under this Agreement shall at
all times be in accordance with the instructions of uBid's officers.
(b) Nothing in this Agreement shall limit or restrict the right of
any of CCI's directors, officers or employees to engage in any other business or
devote their time and attention in part to the management or other aspects of
any other business, whether of a similar nature, or
2
<PAGE>
to limit or restrict the right of CCI to engage in any other business or to
render services of any kind to any corporation, firm, individual, trust or
association.
Section 6. Liability; Indemnification.
--------------------------
(a) CCI shall have no liability whatsoever to uBid for any error,
act or omission in connection with the services to be rendered by CCI to uBid
hereunder unless any such error, act or omission is attributable to CCI's
willful misconduct or gross negligence. The parties acknowledge that Article V
of the Separation and Distribution Agreement between the parties hereto dated
the date hereof provides for indemnification obligations relating to this
Agreement and confirm their agreement to be bound by the terms thereof.
(b) CCI is an independent contractor and when its employees act
under the terms of this Agreement, they shall be deemed at all times to be under
the supervision and responsibility of CCI; and no person employed by CCI and
acting under the terms of this Agreement shall be deemed to be acting as agent
or employee of uBid or any customer of uBid for any purpose whatsoever.
Section 7. Other Agreements.
----------------
From time to time, uBid may find it necessary or desirable either to
enter into agreements covering services of the type contemplated by this
Agreement to be provided by parties other than CCI or to enter into other
agreements covering functions to be performed by CCI hereunder. Nothing in this
Agreement shall be deemed to limit in any way the right of uBid to acquire such
services from others or to enter into such other agreements; provided that in no
such event shall the fees to be paid to CCI pursuant to Section 2 hereof be
reduced on account thereof unless this Agreement is terminated, or the
applicable categories of Services, are cancelled in accordance with Section 3
hereof.
Section 8. Confidentiality.
---------------
CCI agrees to hold in strict confidence, and to use reasonable
efforts to cause its employees and representatives to hold in strict confidence,
all confidential information concerning uBid furnished to or obtained by CCI in
the course of providing the Services (except to the extent that such information
has been (a) in the public domain through no fault of CCI or (b) lawfully
acquired by CCI from sources other than uBid); and CCI shall not disclose or
release any such confidential information to any person, except its employees,
representatives and agents who have a need to know such information in
connection with CCI's performance under this Agreement, unless (i) such
disclosure or release is compelled by the judicial or administrative process, or
(ii) in the opinion of counsel to CCI, such disclosure or release is necessary
pursuant to requirements of law or the requirements of any governmental entity
including, without limitation, disclosure requirements under the Securities
Exchange Act of 1934, as amended.
3
<PAGE>
Section 9. Miscellaneous.
-------------
(a) This Agreement may not be transferred or assigned by either
party, whether voluntarily or by operation of law, without the prior written
consent of the other. This Agreement shall inure to the benefit of and be
binding upon all permitted successors and assigns.
(b) This Agreement shall be governed by the laws of the State of
California (regardless of the laws that might otherwise govern under applicable
principles of conflicts of law) as to all matters, including, but not limited
to, matters of validity, construction, effect, performance and remedies.
(c) This Agreement may be executed in counterparts, each of which
shall constitute an original and both of which together shall be deemed to be
one and the same instrument.
(d) All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered personally
or by facsimile transmission or mailed (certified or registered mail, postage
prepaid, return receipt requested):
If to CCI, to: Creative Computers, Inc.
2555 West 190th Street
Torrance, California 90504
Attention: Chief Financial Officer
Fax No.: (310) 354-5645
If to uBid: uBid, Inc.
2525 Busse Highway
Elk Grove Village, Illinois 60007
Attention: Chief Financial Officer
Fax No.: (847) 616-0322
or to such other person or address as any party shall specify by notice in
writing to the other party. All such notices, requests, demands, waivers and
communications shall be deemed to have been received on the date on which hand
delivered, upon transmission of the facsimile transmission by the sender and
issuance by the transmitting machine of a confirmation slip confirming that the
number of pages constituting the notice have been transmitted without error, or
on the third business day following the date on which so mailed, except for a
notice of change of address, which shall be effective only upon receipt thereof.
In the case of a notice sent by facsimile transmission, the sender shall
contemporaneously mail a copy of the notice to the addressee at the address
provided for above. However, such mailing shall in no way alter the time at
which the facsimile notice is deemed received. In no event shall the provision
of notice pursuant to this Section 9(d) constitute notice for service of
process.
4
<PAGE>
(e) This Agreement contains the entire understanding of the parties
hereto with respect to its subject matter. This Agreement supersedes all prior
agreements and understandings, oral or written, with respect to its subject
matter.
(f) The provisions of Sections 6 and 8 hereof shall survive any
termination of this Agreement.
(g) In the event that any one or more of the provisions contained
herein is held invalid or unenforceable in any respect, the parties shall
negotiate in good faith with a view toward substituting therefor a suitable and
equitable solution in order to carry out the intent and purpose of such invalid
provision; provided, however, that the validity and enforceability of any such
provision in every other respect and of the remaining provisions contained
herein shall not be in any way impaired thereby, it being intended that all of
the rights and privileges of the parties hereto shall be enforceable to the
fullest extent permitted by law.
(h) The Section headings contained in this Agreement are for
reference only and shall not affect the meaning or interpretation of this
Agreement.
Section 10. Arbitration.
-----------
Any dispute, controversy or claim arising out of or relating to this
Agreement or the breach, termination or validity hereof, or any transaction
contemplated hereby shall be settled in accordance with the procedures set forth
in Article VIII of the Separation and Distribution Agreement, dated as of
___________, 1998, by and between CCI and uBid, as if such Article VIII were set
forth herein in its entirety.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
CREATIVE COMPUTERS, INC.
By:____________________________________________
Name: Frank F. Khulusi
Title: Chairman of the Board,
President and Chief Executive Officer
uBID, INC.
By:____________________________________________
Name: Gregory K. Jones
Title: President and Chief Executive Officer
5
<PAGE>
Exhibit 1
---------
Services to be Provided by CCI to uBid
General Accounting Services $cost-plus 10% basis
- ---------------------------
Accounts payable and general ledger services, similar to those currently
furnished by CCI to uBid, will be provided by CCI to uBid. Such Services will
consist of, among other things, the following: (a) receipt and opening of all
vendor mail; (b) maintenance of a vendor master file; (c) processing and
forwarding payment of all vendor invoices; (d) invoice exception reporting and
resolution; (e) monthly financial reporting; and (f) vendor relations.
This category of Services may be cancelled by either party on ninety (90) days
prior written notice and may be renewed by mutual agreement of the parties.
Credit Services $1.50 per order
- ---------------
Credit services, including full credit checking and analysis, will be provided
by CCI to uBid. CCI undertakes to use its best efforts to process each credit
check within twenty-four (24) hours of receipt of a request for a credit check
from uBid.
This category of Services may be cancelled by either party on ninety (90) days
prior written notice and may be renewed by mutual agreement of the parties.
Payroll and Benefit Administration $cost-plus 10% basis
- ---------------------------------- (monthly service fee)
$cost (payroll and benefits)
CCI will administer uBid's payroll and will continue to (i) include uBid's
employees under its group health insurance policies and (ii) permit uBid's
employees to participate in CCI's 401(k) plan until the earlier of the date uBid
establishes its own 401(k) plan for its employees or one (1) year following the
date of this Agreement. uBid will pay to CCI its pro rata portion of the
monthly cost of the health insurance currently provided under CCI's group health
plans for each covered employee listed in Annex A hereto. uBid will also pay
its pro rata portion of the monthly cost of participating in CCI's 401(k) plan
for each participating employee listed in Annex A hereto.
-------
This category of Services may be cancelled by either party on ninety (90) days
prior written notice and may be renewed by mutual agreement of the parties.
Exhibit 1
<PAGE>
EXHIBIT 10.4
JOINT MARKETING AGREEMENT
JOINT MARKETING AGREEMENT, dated as of _________, 1998 (this "Agreement"),
by and between Creative Computers, Inc., a Delaware corporation ("CCI"), and
uBid, Inc., a Delaware corporation ("uBid").
WHEREAS, uBid is currently a wholly-owned subsidiary of CCI;
WHEREAS, CCI and uBid have undertaken certain joint advertising and
marketing efforts relating to their respective businesses;
WHEREAS, uBid is considering an initial public offering of its Common Stock
("IPO");
WHEREAS, after the IPO, CCI will own approximately 80.1% of the outstanding
shares of uBid's Common Stock (the "Retained Shares");
WHEREAS, subject to the conditions set forth in the Separation and
Distribution Agreement, dated as of _________________, 1998, by and between CCI
and uBid, CCI will distribute to its stockholders, not earlier than six months
following the IPO, all of the Retained Shares in a tax-free distribution (the
"Distribution"); and
WHEREAS, after the IPO, uBid and CCI desire to continue such joint
advertising and marketing efforts in accordance with the terms and conditions
set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual promises and
representations contained herein, and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the parties hereto do mutually
covenant, stipulate and agree as follows:
Section 1. Joint Advertising and Marketing Efforts.
---------------------------------------
(a) uBid shall continue (i) to appear constantly on at least a
quarter (1/4) of the home page of CCI's "PC MALL" website, and (ii) to be the
subject of a continuing banner advertisement on the home page of CCI's "PC MALL"
website. CCI and uBid specifically agree that the form, content and design of
any and all advertisements featuring uBid shall continue to be developed by or
on behalf of uBid and shall be subject to uBid's final approval.
(b) CCI shall have the benefit of a "click through" from the home
page of uBid's website to CCI's "PC MALL" website.
Section 2. Compensation.
------------
In addition to the consideration to CCI provided for in Section 1(b)
above, uBid shall pay CCI a monthly fee of $10,000 for the advertising and
marketing services described in Section 1(a) above (such fee to be paid no later
than thirty (30) days after the close of each month during the term of this
Agreement) or CCI, in CCI's sole discretion, may elect to receive a banner
advertisement on each page of the uBid Website in lieu of such monthly fee. The
form,
<PAGE>
content and design of any such banner advertisement shall be designed by or on
behalf of CCI and shall be subject to CCI's final approval
Section 3. Term.
----
The initial term of this Agreement shall commence on the date hereof
and shall continue for a period of one year unless earlier terminated by either
party upon sixty (60) days prior written notice.
Section 4. Mutual Covenant as to Banner Advertisements.
-------------------------------------------
Each of CCI and uBid hereby covenant and agrees that their
respective banner advertisements provided for herein shall at all times comply
with all applicable laws, rules and regulations and will not contain any
material which is obscene, threatening, fraudulent, harassing, libelous,
infringing of third party intellectual property rights, otherwise illegal or, in
the reasonable judgment of the party required to display the advertisement,
offensive.
Section 5. Exclusivity.
-----------
During the term of this Agreement (a) CCI shall not sell any banner
space to any other online auction site or otherwise permit any other online
auction service to advertise on any of CCI's websites, and (b) uBid shall not
sell any banner space to or otherwise permit any business in direct competition
with CCI to advertise on any of uBid's websites.
Section 6. Miscellaneous.
-------------
(a) This Agreement may not be transferred or assigned by either
party, whether voluntarily or by operation of law, without the prior written
consent of the other. This Agreement shall inure to the benefit of and be
binding upon all permitted successors and assigns.
(b) This Agreement shall be governed by the laws of the State of
California (regardless of the laws that might otherwise govern under applicable
principles of conflicts of law) as to all matters, including, but not limited
to, matters of validity, construction, effect, performance and remedies.
(c) This Agreement may be executed in counterparts, each of which
shall constitute an original and both of which together shall be deemed to be
one and the same instrument.
(d) All notices, requests, demands, waivers and other communications
required or permitted to be given under this Agreement shall be in writing and
shall be deemed to have been duly given if delivered personally or by facsimile
transmission or mailed (certified or registered mail, postage prepaid, return
receipt requested):
2
<PAGE>
If to CCI, to: Creative Computers, Inc.
2555 West 190th Street
Torrance, California 90504
Attention: Chief Financial Officer
Fax No.: (310) 354-5645
If to uBid: uBid, Inc.
2525 Busse Highway
Elk Grove Village, Illinois 60007
Attention: Chief Financial Officer
Fax No.: (310) 616-0322
or to such other person or address as any party shall specify by notice in
writing to the other party. All such notices, requests, demands, waivers and
communications shall be deemed to have been received on the date on which hand
delivered, upon transmission of the facsimile transmission by the sender and
issuance by the transmitting machine of a confirmation slip confirming that the
number of pages constituting the notice have been transmitted without error, or
on the third business day following the date on which so mailed, except for a
notice of change of address, which shall be effective only upon receipt thereof.
In the case of a notice sent by facsimile transmission, the sender shall
contemporaneously mail a copy of the notice to the addressee at the address
provided for above. However, such mailing shall in no way alter the time at
which the facsimile notice is deemed received. In no event shall the provision
of notice pursuant to this Section 6(d) constitute notice for service of
process.
(e) This Agreement contains the entire understanding of the parties
hereto with respect to its subject matter. This Agreement supersedes all prior
agreements and understandings, oral or written, with respect to its subject
matter.
(f) In the event that any one or more of the provisions contained
herein is held invalid or unenforceable in any respect, the parties shall
negotiate in good faith with a view toward substituting therefor a suitable and
equitable solution in order to carry out the intent and purpose of such invalid
provision; provided, however, that the validity and enforceability of any such
provision in every other respect and of the remaining provisions contained
herein shall not be in any way impaired thereby, it being intended that all of
the rights and privileges of the parties hereto shall be enforceable to the
fullest extent permitted by law.
(g) The Section headings contained in this Agreement are for
reference only and shall not affect the meaning or interpretation of this
Agreement.
Section 7. Arbitration.
-----------
Any dispute, controversy or claim arising out of or relating to this
Agreement or the breach, termination or validity hereof, or any transaction
contemplated hereby shall be settled in accordance with the procedures set forth
in Article VIII of the Separation and Distribution
3
<PAGE>
Agreement, dated as of _________, 1998, by and between CCI and uBid, as if such
Article VIII were set forth herein in its entirety.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
CREATIVE COMPUTERS, INC.
By:_____________________________________
Name: Frank F. Khulusi
Title: Chairman of the Board,
President and Chief Executive Officer
uBID, INC.
By:_____________________________________
Name: Gregory K. Jones
Title: President and Chief Executive Officer
4
<PAGE>
EXHIBIT 10.8
SUBLEASE AGREEMENT
------------------
THIS SUBLEASE AGREEMENT (this "Sublease"), dated as of July 1, 1998 (the
"Effective Date"), is made by and between CREATIVE COMPUTERS, INC., a California
corporation ("Sublessor") and uBID, INC., a Delaware corporation ("Sublessee").
1. Premises. Sublessor hereby subleases to Sublessee and Sublessee hereby
--------
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain improved space (the "Subleased
Premises") consisting of approximately one hundred thousand (100,000) rentable
square feet, situated in that certain industrial building (the "Building")
located at 4515 East Shelby Drive, Memphis, Tennessee 38118. A depiction of
the Subleased Premises is attached hereto as Exhibit "A-1." The parties hereto
------------
acknowledge and agree that during the first ninety (90) days of the term of this
Sublease the Subleased Premises shall consist of Fifty Thousand (50,000)
rentable square feet as depicted on Exhibit "A-2." During the term of this
------------
Sublease, Sublessee shall have the right to use Sublessor's current inventory
control and shipping systems ("Systems") to the extent permitted under
Sublessor's licenses relating thereto at no additional cost to Sublessee.
Notwithstanding the foregoing, Sublessor shall have no liability whatsoever to
Sublessee for any error, act, omission, or failure associated with the Systems
or the use by Sublessee thereof, unless such error, act, omission or failure is
attributable to Sublessor's willful misconduct or gross negligence. In addition,
in no event shall Sublessee be entitled to any reduction in or offset to Basic
Rent or Additional Rent hereunder as a result of any such error, act, omission
or failure or in the event Sublessee elects at any time to discontinue its use
of the Systems.
2. Master Lease. Sublessor is the lessee of the Subleased Premises and other
------------
additional office space by virtue of that certain Industrial Lease Agreement
dated September 15, 1995 (the "Master Lease"), between Corporate Estates, Inc.,
a California corporation ("Master Landlord") and Sublessor, as lessee, a copy of
which is attached hereto as Exhibit "B." Capitalized terms not otherwise
----------
defined herein shall have the meaning ascribed to such terms in the Master
Lease. Sublessor hereby represents and warrants to Sublessee that Sublessor is
not in default under the Master Lease nor is Sublessor aware of any default of
Master Landlord under the Master Lease.
3. Term.
----
3.1 Term. The term (the "Term") of this Sublease shall commence on the
----
"Commencement Date" (as defined below) and expire on the expiration of the term
of the Master Lease unless sooner terminated pursuant to any provision hereof.
The parties acknowledge and agree that the Commencement Date shall occur on the
later of (i) August 1, 1998, or (ii) the date the parties obtain Master
Landlord's consent pursuant to Section 6 below.
----------
3.2 Early Occupancy. In the event that Sublessee occupies the Subleased
---------------
Premises for business purposes prior to the Commencement Date, such occupancy
shall be subject to all provisions hereof, and such occupancy shall not advance
the termination date.
4. Rent.
----
4.1 Basic Rent. Sublessee shall pay to Sublessor in advance, on the first
----------
(1st) day of each month, rent (the "Basic Rent") for the Subleased Premises in
the amount of (i) Eleven Thousand Four Hundred Fifty-Eight and 33/100 Dollars
($11,458.33) during the first three (3) months of the Term of this Sublease, and
(ii) Twenty-Two Thousand Nine Hundred Sixteen and 67/100 Dollars ($22,916.67)
for each month thereafter. Sublessee shall pay Sublessor upon the execution of
this Sublease the amount of Eleven Thousand Four Hundred Fifty-Eight and 33/100
Dollars ($11,458.33) as rent for the first (1st) month of the Term of this
Sublease. Rent for any period during the Term hereof which is for less than one
(1) month shall be a prorata portion of the monthly installment. Rent shall be
payable in lawful money of the United States to Sublessor at the address stated
herein or to such other persons or at such other places as Sublessor may
designate in writing.
<PAGE>
4.2 Additional Rent.
---------------
(a) Sublessee shall pay to Sublessor as additional rent for the
Subleased Premises Sublessee's proportionate share ("Sublessee's Proportionate
Share") of Tenant's proportionate share of all Additional Rent and "operating
expenses" (as defined and pursuant to Section 6 of the Master Lease) and real
estate taxes and other impositions. Sublessee's Proportionate Share shall be
equal to the fraction, the numerator consisting of the then existing rentable
square feet of the Subleased Premises and the denominator consisting of 325,000.
Sublessee shall pay Sublessor's Proportionate Share of Additional Rent to
Sublessor within ten (10) days of invoice.
(b) In addition, to the extent that during the term hereof, Sublessee
requires extraordinary services or any resource in excess of that customarily
supplied to Sublessor's other premises under the Master Lease, Sublessee shall
contract, at Sublessee's sole costs and expense, with Master Landlord for such
services. Sublessor and Sublessee acknowledge and agree that Sublessee shall
not be required to pay any additional charge for basic services Master Landlord
is required to so provide without additional charge to Sublessor pursuant to
Section 6 of the Master Lease.
4.3 Payment of Rent and Consent to Sublease. Notwithstanding anything to
---------------------------------------
the contrary contained herein, Basic Rent and Additional Rent shall be payable
in the amounts and at the times set forth in this Section 4 regardless of the
---------
date that the parties hereto receive Master Landlord's consent to this Sublease
pursuant to Section 6 below. In the event, however, Master Landlord denies or
----------
fails to consent to this Sublease prior to the expiration of the Approval Period
(as defined in Section 6 below), Sublessee shall be entitled to the prompt
---------
return of all rent paid applicable to the period following the date Master
Landlord denied the approval of this Sublease and this Sublease shall be of no
further force or effect and the parties hereto shall have no further obligation
to each other.
5. Use. The Subleased Premises shall be used and occupied for office,
---
warehouse and distribution of computers and related equipment and other uses
related to Sublessee's business any other uses permitted under the Master Lease.
Sublessee's business shall be conducted throughout the term hereof so as not to
violate any term, provision or condition of the Master Lease. Sublessee shall
comply with all applicable statutes, ordinances, rules, regulations, orders,
restrictions of record and requirements in effect during the term hereof
regulating the use by Sublessee of the Subleased Premises; provided however,
Sublessee shall not be responsible for violations of applicable law relating to
the Subleased Premises occurring prior to Sublessee's occupancy of the Subleased
Premises.
6. Consent of Master Landlord. The parties hereto acknowledge that the Master
--------------------------
Lease requires that Sublessor obtain the consent of Master Landlord to any
subletting of the Subleased Premises. Therefore Sublessor and Sublessee agree
that this Sublease shall be terminated pursuant to Section 32 below unless,
----------
within thirty (30) days of the date hereof (the "Approval Period"), Master
Landlord grants its express consent to the terms and conditions of this
Sublease.
7. Environmental Matters.
---------------------
(a) For purposes of this Sublease:
(i) "Contamination" as used herein means the uncontained or
uncontrolled presence of or release of Hazardous Substances (as hereinafter
defined) into any environmental media from, upon, within, below, into or on any
portion of the Subleased Premises, the Building, or the Project so as to require
remediation, cleanup or investigation under any applicable Environmental Law (as
hereinafter defined).
(ii) "Environmental Laws" as used herein means all federal, state,
and local laws, regulations, orders, permits, ordinances or other requirements,
concerning Hazardous Substances, and the protection of human health, safety and
the environment, all as may be amended from time to time.
2
<PAGE>
(iii) "Hazardous Substances" as used herein means any hazardous or
toxic substance, material, chemical, pollutant, contaminant or waste as those
terms are defined by any applicable Environmental Laws (including, without
limitation, the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. 9601 et seq. ("CERCLA") and the Resource Conservation and
Recovery Act, 42 U.S.C. 6901 et seq. ["RCRA"]) and any solid wastes,
polychlorinated biphenyls, urea formaldehyde, asbestos, radioactive materials,
radon, explosives, petroleum products and oil.
(b) Sublessee represents that all its activities on the Subleased
Premises, the Building, or the Project during the course of this Sublease will
be conducted in compliance with Environmental Laws. Sublessee warrants that at
its warehouse facilities (i) to Sublessee's actual knowledge, is currently in
compliance with all applicable Environmental Laws and (ii) that there are no
pending or threatened notices of deficiency, notices of violation, orders, or
judicial or administrative actions involving alleged violations by Sublessee of
any Environmental Laws. Sublessee, at Sublessee's sole cost and expense, shall
be responsible for obtaining all permits or licenses or approvals under
Environmental Laws for Sublessee's operation of its business on the Subleased
Premises and shall make all notifications and registrations required by any
applicable Environmental Laws. Sublessee, at Sublessee's sole cost and expense
shall at all times comply with the terms and conditions of all such permits,
licenses, approvals, notifications and registrations with any other applicable
Environmental Laws. Sublessee warrants that it will apply for all such permits,
licenses or approvals and made all such notifications and registrations required
by any applicable Environmental Laws necessary for Sublessee's operation of its
business on the Subleased Premises prior to the Commencement Date and will
obtain prior to the Commencement Date or as soon thereafter as reasonably
possible all such permits, licenses or approvals.
(c) Sublessee shall not cause or permit any Hazardous Substances to be
brought upon, kept or used in or about the Subleased Premises, the Building, or
the Project without the prior written consent of Landlord, which consent shall
not be unreasonably withheld; provided, however, that the consent of Landlord
-------- -------
shall not be required for the use at the Subleased Premises of cleaning
supplies, toner for photocopying machines and other similar materials, in
containers and quantities reasonably necessary for and consistent with normal
and ordinary use by Sublessee, at the Subleased Premises, in the routine
operation or maintenance of Sublessee's office equipment or in the routine
janitorial service, cleaning and maintenance for the Subleased Premises. For
purposes of this Section 7, Landlord shall be deemed to have reasonably withheld
---------
consent if Landlord determines that the presence of such Hazardous Substance
within the Subleased Premises could result in a risk of harm to person or
property or otherwise negatively affect the value or marketability of the
Building or the Project.
(d) Sublessee shall not cause or permit the release of any Hazardous
Substances by Sublessee or its agents, contractors, employees or invitees into
any environmental media such as air, water or land, or into or on the Subleased
Premises, the Building or the Project in any manner that violates any
Environmental Laws. If such release shall occur, Tenant shall (i) take all
steps reasonably necessary to contain and control such release and any
associated Contamination, (ii) clean up or otherwise remedy such release and any
associated Contamination to the extent required by, and take any and all other
actions required under, applicable Environmental Laws and (iii) notify and keep
Sublessor and Landlord reasonably informed of such release and response.
(e) Sublessee shall under no circumstances whatsoever (i) cause or permit
any activity on the Subleased Premises which would cause the Subleased Premises
to become subject to regulation as a hazardous waste treatment, storage or under
RCRA or the regulations promulgated thereunder; (ii) discharge Hazardous
Substances into the storm sewer system serving the Project; or (iii) install any
storage tank or underground piping on or under the Subleased Premises.
(f) Sublessee shall and hereby does indemnify Sublessor and Master
Landlord and hold Sublessor and Master Landlord harmless from and against any
and all expense, loss, and liability suffered by Sublessor or Master Landlord
(with the exception of those expenses, losses, and liabilities arising from
Sublessor's or Master Landlord's own negligence or willful act), by reason of
Sublessee's improper storage, generation, handling, treatment, transportation,
disposal, or arrangement for transportation or disposal, of any Hazardous
Substances (whether accidental, intentional, or negligent) or by reason of
3
<PAGE>
Sublessee's breach of any of the provisions of this Section 7. Such expenses,
---------
losses and liabilities shall include, without limitation, (i) any and all
expenses that Sublessor or Master Landlord may incur to comply with any
Environmental Laws as a result of Sublessee's failure to comply therewith; (ii)
any and all costs that Sublessor or Master Landlord may incur in studying or
remedying any Contamination at or arising from the Subleased Premises, the
Building, or the Project; (iii) any and all costs that Sublessor or Master
Landlord may incur in studying, removing, disposing or otherwise addressing any
Hazardous Substances; (iv) any and all fines, penalties or other sanctions
assessed upon Sublessor or Master Landlord by reason of Sublessee's failure to
comply with Environmental Laws; and (v) any and all legal and professional fees
and costs incurred by Sublessor or Master Landlord in connection with the
foregoing. The indemnity contained herein shall survive the termination or
expiration of this Sublease.
(g) Sublessor and Master Landlord shall have the right, but not the
obligation, to enter the Subleased Premises at reasonable times throughout the
Term upon two (2) business days prior notice, except in the event of any
emergency, to audit and inspect the Subleased Premises for Sublessee's
compliance with this Section 7.
---------
8. Condition of Premises and Alterations. The Subleased Premises sublet
-------------------------------------
hereunder shall be taken and leased by Sublessee in their "as is" condition
existing as of the date hereof. Except for non-structural alterations costing
less than Ten Thousand and No/100 Dollars ($10,000.00), Sublessee shall not make
or suffer to be made any alterations, additions or improvements to or of the
Subleased Premises or any part thereof without first obtaining the prior written
consent of Master Landlord and Sublessor. Sublessor agrees that Sublessor's
consent to such alterations, additions or improvements shall not be unreasonably
withheld or delayed. In the event Sublessor consents to the making of any
alterations, additions or improvements to the Subleased Premises by Sublessee
the same shall be made by Sublessee at Sublessee's sole cost and expense. Upon
the expiration or sooner termination of the term hereof, Sublessee shall, upon
written demand by Sublessor given at least thirty (30) days prior to the end of
the term, at Sublessee's sole cost and expense, forthwith and with all due
diligence remove any alterations, additions, or improvements made by Sublessee,
designated by Sublessor to be removed and further, Sublessee shall, forthwith
and with all due diligence at its sole cost and expense, repair any damage to
the Subleased Premises caused by such removal. In all events, Sublessee shall
maintain the Subleased Premises in good condition and repair and shall surrender
the Subleased Premises to Sublessor upon expiration of this Sublease, or the
sooner termination thereof, in good condition and repair, excluding ordinary
wear and tear.
9. Liens. Sublessee shall keep the Subleased Premises free from any liens
-----
arising out of any work performed or obligations incurred by or for Sublessee or
materials furnished to Sublessee. Sublessor shall have the right to post
notices of nonresponsibility with respect to any work performed or obligations
incurred by or for Sublessee or materials furnished to Sublessee. If Sublessee
fails to keep the Subleased Premises free from any such liens and does not,
within ten (10) days following the imposition of any such lien, cause the same
to be released of record by payment or posting of a proper bond, Sublessor shall
have, in addition to all other remedies provided herein and by law, the right
but not the obligation, to cause the same to be released by such means as it
shall deem proper, including payment of or defense against the claim giving rise
to such lien. All sums paid by Sublessor and all expenses incurred by it in
connection therewith (including, without limitation, reasonable attorneys, fees)
shall create automatically an obligation of Sublessee to pay an equivalent
amount as Additional Rent, which Additional Rent shall be payable by Sublessee
on Sublessor's demand with interest at the maximum rate per annum permitted by
law until paid. Such interest charged shall not constitute Sublessor's
exclusive remedy nor compromise or limit any other rights granted Sublessor by
this Sublease or by law or equity. Nothing herein shall imply any consent by
Sublessor to subject Sublessor's estate to liability under any mechanic's lien
law. Sublessee may contest the validity and/or amount of any lien imposed on
the Subleased Premises, provided that Sublessee has caused such lien to be
released of record by the payment or posting of the proper bond.
10. Repairs. Sublessee shall promptly make all repairs to the Subleased
-------
Premises not required to be made by Master Landlord pursuant to the Master
Lease, including, but not limited to special items and equipment installed by or
on behalf of Sublessee. Sublessee shall pay for any repairs to the Subleased
Premises or the Building made necessary by any act, neglect, misuse or omission
of duty by Sublessee or its assignees, subtenants, employees, invitees or their
respective agents or other persons permitted in the
4
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Subleased Premises or on any other portion of the Building by Sublessee, or any
of them, and will maintain the Subleased Premises, and will leave the Subleased
Premises upon termination of this Sublease, in a safe, clean, neat and sanitary
condition. If Sublessee fails to maintain the Subleased Premises in good order,
condition and repair, Sublessor shall give Sublessee notice to do such acts as
are reasonably required to so maintain the Subleased Premises. If Sublessee
fails to promptly commence such work and diligently prosecute it to completion,
Sublessor shall have the right to do such acts and expend such funds at the
expense of Sublessee as are reasonably required to perform such work. Prior to
commencing any item of repair or maintenance work which is connected to the
Building or may affect any structural portion of the Building or any of its
basic systems (including, without limitation, air conditioning, heating,
plumbing, electrical, and light fixtures), Sublessee shall notify Master
Landlord and Sublessor and obtain Master Landlord's and Sublessor's prior
written approval of the contractor who will perform such work. Master Landlord
or Sublessor may elect to perform the required work at Sublessee's cost. All
amounts payable by Sublessee to Sublessor pursuant to this Section 10 shall be
----------
paid as Additional Rent within ten (10) days after Sublessor delivers to
Sublessee invoices or cancelled checks evidencing such payment obligations.
Notwithstanding the foregoing, the parties hereto acknowledge and agree that
Master Landlord shall remain responsible for the performance of all repairs
expressly required to be performed by Master Landlord pursuant to the terms and
conditions of the Master Lease ("Landlord's Repair Obligations"). Sublessee
shall notify both Master Landlord and Sublessor in the event that Master
Landlord shall fail to perform Landlord's Repair Obligations. Upon such
notification and in addition to such other rights and remedies Sublessor shall
have under the Master Lease, Sublessor shall either (i) take reasonable action
under the Master Lease to require Master Landlord to perform its obligations
thereunder, or (ii) permit Sublessee, with Sublessor's reasonable cooperation,
to enforce Master Landlord's repair obligations under the Master Lease.
11. Damage or Destruction. In the event of damage or destruction to the
---------------------
Building or any part thereof, the Master Lease shall either continue or
terminate pursuant to Section 20 of the Master Lease. If the Master Lease
----------
terminates, the Sublease shall also terminate. If the Master Lease does not
terminate, then Master Landlord shall commence the necessary repair or
restoration of the Building, including that portion of the Subleased Premises,
if any, suffering damage or destruction, as required under the Master Lease.
Sublessor shall have no responsibility whatsoever for the repair or restoration
of the Subleased Premises, it being acknowledged by Sublessee that any repairs
must be performed, if at all, by Master Landlord. There shall be no reduction
or abatement of rent for any period during which Sublessee is unable to use the
Subleased Premises, in whole or in part, due to the repairs or restoration
required under this paragraph, unless Sublessor actually receives a reduction or
abatement in rent under the terms of the Master Lease and then, only to the
extent such reduction or abatement relates to the Subleased Premises. In any
event Sublessee shall not be entitled to any insurance proceeds or other
remuneration except for insurance proceeds from insurance policies it purchased
for its own personal property.
12. Eminent Domain or Condemnation. In the event a proceeding in eminent
------------------------------
domain or condemnation is instituted against the Building, or any part thereof,
the Master Lease shall either continue or terminate pursuant to Section 21 of
----------
the Master Lease. If the Master Lease terminates, this Sublease shall also
terminate. If the Master Lease does not terminate and the Subleased Premises
have not been materially affected, then the Sublease shall continue in full
force and effect except that the rental payable hereunder shall be reduced to
the extent that rent applicable to the Subleased Premises is equitably reduced
under the Master Lease. If the Master Lease does not terminate and the
Subleased Premises are materially and substantially affected by the proceeding
in eminent domain or condemnation, then Sublessee shall have the right to
terminate the Sublease. In any event, Sublessee shall not be entitled to any
award of damages for Sublessee's interest in the Subleased Premises.
Notwithstanding the foregoing, nothing contained herein shall prevent Sublessee
from seeking an award against a taking authority for the taking of personal
property and fixtures owned by Sublessee or for moving expenses as a result of
such taking; provided however, the award sought and received by Sublessee shall
not diminish or affect, in whole or in part the award sought by Master Landlord
or Sublessor.
5
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13. Waiver of Liability; Indemnification. Without limiting in any way the
------------------------------------
effect or generality of all indemnification and waiver provisions contained as
part of the terms of the Master Lease, which are incorporated herein pursuant to
Section 38 below, Sublessee hereby agrees that:
- ----------
(a) Sublessor shall not be liable to Sublessee, and Sublessee hereby
waives all claims against Sublessor, for any injury or damage to any person or
property in or about the Subleased Premises by or from any cause whatsoever
other than by reason of the negligent acts or willful misconduct of Sublessor.
(b) Sublessee shall defend, indemnify and hold Sublessor and Master
Landlord harmless against any and all claims or liability for any injury or
damage to any person or property whatsoever when such injury or damage shall be
caused in part or in whole by the act, neglect, fault of, or omission of any
duty with respect to the same, by Sublessee, its agents, servants, employees, or
invitees: (i) occurring in, on, or about the Subleased Premises or any part
thereof, and (ii) occurring in, on, or about any facilities (including, without
prejudice to the generality of the term "facilities," elevators, stairways,
passageways or hallways) the use of which Sublessee may have in conjunction with
other tenants of the Building.
(c) Sublessee and Sublessor each hereby, on behalf of itself and all
persons and parties claiming under or through it, including without limitation
its insurance carrier(s), waives any right of recovery or claim against the
other for any damage to or destruction of any property located in or about the
Subleased Premises which results from or arises out of any casualty or event
insured by any casualty and/or property insurance policy carried by such waiving
party, regardless of the cause or origin of such casualty or event, including
without limitation, the negligence of Sublessee or Sublessor.
14. Assignment and Subletting.
-------------------------
(a) Sublessee shall not sell, assign, encumber or otherwise transfer by
operation of law or otherwise this Sublease or any interest herein, sub-sublet
the Subleased Premises, or suffer any other person to occupy or use the
Subleased Premises or any portion thereof, without the prior written consent of
Sublessor and Master Landlord as provided herein, nor shall Sublessee permit any
lien to be placed on the Sublessee's interest by operation of law or otherwise.
Sublessee shall, by written notice, advise Sublessor of its desire from and
after a stated date (which shall not be less than ten (10) days nor more than
ninety (90) days after the date of Sublessee's notice), to subsublet the
Subleased Premises or any portion thereof for any part of the term hereof. Said
notice by Sublessee shall state the name and address of the proposed sub-
subtenant, together with such proposed sub-subtenant's certified financial
statements, and Sublessee shall deliver to Sublessor a true and complete copy of
the proposed subsublease with said notice. Sublessor shall not unreasonably
withhold its own consent to such sub-sublease, provided Master Landlord shall
also give its consent.
(b) Any sub-subletting hereunder by Sublessee shall not result in
Sublessee being released or discharged from any liability under this Sublease.
Any consent by Sublessor to any sub-subletting of the Subleased Premises or any
part thereof by Sublessee shall not be deemed to be a consent to any other sub-
subletting of the Subleased Premises and shall not constitute a waiver of the
requirements of Sublessor's consent to any other subsubletting of the Subleased
Premises as such requirement is stated herein. Any sale, assignment,
encumbrance, subsubletting, occupation, lien or other transfer of this Sublease
which does not comply with the provisions of this paragraph shall be voidable
and at Sublessor's election shall constitute a default hereunder.
(c) Sublessee shall pay to Sublessor of all rent received by Sublessee
from any sub-subletting hereunder in excess of the rent payable by Sublessee to
Sublessor under this Sublease, and any sums paid to Sublessee by any assignee
hereunder in consideration of the assignment of this Sublease. Sublessee hereby
irrevocably assigns to Sublessor, as security for Sublessee's obligations under
this Sublease, all rent from any sub-subletting provided, however, that until
the occurrence of an event of default by Sublessee hereunder, Sublessee shall
have the right to collect such rent.
15. Incorporation of Terms of Master Lease. It is expressly understood,
--------------------------------------
acknowledged and agreed by Sublessee that all of the other terms, conditions and
covenants of this Sublease shall be those stated in
6
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the Master Lease but only to the extent that the terms of the Master Lease
relate to the Subleased Premises, except for (i) the basic rent obligations set
forth in Article 4 of the Master Lease, (ii) the Additional Rent obligations set
forth in Article 6 of the Master Lease, subject however to Section 4 above and
---------
(iii) Articles 16 through 18, inclusive, 35 through 37, inclusive, 39 and 40 of
the Master Lease. Sublessee shall and hereby agrees to be subject to and bound
by and to comply with the Master Lease with respect to the Subleased Premises
and to satisfy all applicable terms and conditions of the Master Lease for the
benefit of both Sublessor and Master Landlord, and that upon the breach of any
of said terms, conditions or covenants of the Master Lease by Sublessee or upon
the failure of the Sublessee to pay rent or comply with any of the provisions of
this Sublease, Sublessor may exercise any and all rights and remedies granted to
Master Landlord by the Master Lease, as well as any and all rights and remedies
granted to Sublessor by this Sublease. It is further understood and agreed that
the Sublessor has no duty or obligation to the Sublessee under the Master Lease
other than to maintain the Master Lease in full force and effect during the term
of this Sublease, provided, however, that Sublessor shall not be liable to
Sublessee for any earlier termination of the Master Lease which is not due to
the fault of Sublessor. Whenever the provisions of the Master Lease which have
been incorporated as provisions of this Sublease require the written consent of
the Master Landlord, said provisions shall be construed to require the written
consent of both the Master Landlord and the Sublessor. Sublessor hereby
covenants that its consent shall not be unreasonably withheld or delayed.
Sublessee hereby acknowledges that it has read and is familiar with the terms of
the Master Lease, and agrees that this Sublease is subordinate and subject to
the Master Lease and that any termination thereof shall likewise terminate this
Sublease. Sublessee further agrees that, in executing this Sublease and assuming
the obligations of lessee under the Master Lease (to the extent applicable), it
has not been granted any of the rights of Sublessor, as lessee under the Master
Lease, such rights being specifically reserved by Sublessor, except to the
extent granted to Sublessee hereunder. In the event of any inconsistencies
between any of the provisions of this Sublease and the Master Lease, the terms
of this Sublease shall govern.
16. Personal Property Taxes. Sublessee shall pay or cause to be paid, before
-----------------------
delinquency, any and all taxes levied or assessed and which become payable
during the term hereof upon all Sublessee's leasehold improvements, equipment,
furniture, fixtures and personal property located in the Subleased Premises.
17. Default and Remedies.
--------------------
(a) The occurrence of any one or more of the following events shall
constitute a material default and breach of this Sublease by Sublessee:
(i) The failure by Sublessee to make any payment of rent or any
other payment required to be made by Sublessee hereunder, as and when due, where
such failure shall continue for a period of three (3) days after written notice
thereof by Sublessor to Sublessee;
(ii) The abandonment (but not vacation of the Subleased Premises
provided Sublessee continue to timely pay all rent due hereunder) of the
Subleased Premises by Sublessee;
(iii) The failure by Sublessee to observe or perform any of the
covenants, conditions or provisions of this Sublease to be observed or performed
by Sublessee, where such failure shall continue for a period of twenty (20) days
after written notice thereof by Sublessor to Sublessee. If the nature of such
default is such that the same cannot be reasonably cured within such twenty (20)
day period, Sublessee shall not be deemed to be in default hereunder if
Sublessee shall within such period commence such cure and thereafter diligently
prosecute the same to completion, provided Master Landlord has not declared a
material default and breach of the Master Lease as a result of Sublessee's
failure to cure such default;
(iv) The making by Sublessee of any general assignment or general
arrangement for the benefit of creditors; or the filing by or against Sublessee
of a petition to have Sublessee adjudged a bankrupt, or a petition for
reorganization or arrangement under any law, now existing or hereafter amended
or enacted, relating to bankruptcy or insolvency (unless, in the case of a
petition filed against Sublessee, Sublessee has not consented to, or admitted
the material allegation of said petition is dismissed within thirty
7
<PAGE>
(30) days); or the appointment of a trustee or a receiver (other than in a
bankruptcy or insolvency proceeding) to take possession of substantially all of
Sublessee's assets located at the Subleased Premises or of Sublessee's interest
in this Sublease, where possession is not restored to Sublessee within thirty
(30) days; or
(v) Sublessee causes a material default and breach under the Master
Lease.
(b) In the event of any such material default or breach by Sublessee,
Sublessor may, at any time thereafter, with or without notice or demand, and
without limiting Sublessor in the exercise of any right or remedy which
Sublessor may have hereunder, under the Master Lease as incorporated herein or
otherwise at law or in equity by reason of such default or breach, including,
but not limited to:
(i) Terminate this Sublease and Sublessee's right to possession of
the Subleased Premises by notice to Sublessee or any other lawful means, in
which case this Sublease shall terminate and Sublessee shall immediately
surrender possession of the Subleased Premises to Sublessor. In such event
Sublessor shall be entitled to recover from Sublessee all unpaid installments of
rent and other sums due and owing under this Sublease as of the date of
Sublessee's default and all damages incurred by Sublessor by reason of
Sublessee's default, including, but not limited to:
(A) The cost of recovering possession of the Subleased
Premises; or
(B) The worth at the time of award by the court having
jurisdiction thereof of the amount by which the unpaid rent for the balance of
the term after the time of such award exceeds the amount of such rental loss for
the same period that Sublessee proves could be reasonably avoided.
Unpaid installments of rent or other sums shall bear interest from the date due
at the highest legal rate permissible in the State where the Subleased Premises
are located. In the event Sublessee shall have abandoned the Subleased
Premises, Sublessor shall have the option of (1) taking possession of the
Subleased Premises and recovering from Sublessee the amounts specified
hereinabove, or (2) proceeding under the provisions of the following paragraphs
(ii) and/or (iii).
(ii) Maintain Sublessee's right to possession, in which case this
Sublease shall continue in effect whether or not Sublessee shall have abandoned
the Subleased Premises. In such event Sublessor shall be entitled to enforce
all of Sublessor's rights and remedies under this Sublease, including, without
limitation, the right to recover the rent as it becomes due hereunder.
Notwithstanding any election by Sublessor not to terminate this Sublease or
Sublessee's right to possession, and whether or not Sublessor has sublet the
Subleased Premises or any part thereof as provided hereinabove, Sublessor shall
retain the right to and may at any time thereafter elect to terminate this
Sublease or Sublessee's right to possession for any default of Sublessee which
remains uncured or for any subsequent default of Sublessee by giving Sublessee
written notice thereof.
(iii) Pursue any other remedy now or thereafter available to Sublessor
under the laws or judicial decisions of the State in which the Subleased
Premises are located.
(c) No entry or taking of possession of the Subleased Premises or any part
thereof by Sublessor, nor any subletting thereof by Sublessor for Sublessee, nor
any appointment of a receiver, nor any other act of Sublessor, whether
acceptance of keys to the Subleased Premises or otherwise, shall constitute or
be construed as an election by Sublessor to terminate this Sublease or
Sublessee's right to possession of the Subleased Premises unless a written
notice of such election be given to Sublessee by Sublessor.
(d) In the event Sublessor elects to terminate this Sublease or
Sublessee's right to possession hereunder, Sublessee shall surrender and vacate
the Subleased Premises in broom-clean condition, and Sublessor may re-enter and
take possession of the Subleased Premises and may eject all parties in
possession or eject some and not others or eject none. Any personal property of
or under the control of
8
<PAGE>
Sublessee remaining on the Subleased Premises at the time of such re-entry may
be considered and treated by Sublessor as abandoned.
(e) Termination of this Sublease or Sublessee's right to possession by
Sublessor shall not relieve Sublessee from any liability to Sublessor under any
provision of this Sublease providing for any indemnification of Sublessor by
Sublessee.
18. Brokers. Sublessee and Sublessor each represent and warrant to one another
-------
that no brokers brought about or had any connection with the procuring,
execution, or delivery of this Sublease, and each party hereto agrees to
indemnify and hold the other harmless against any claims by any broker for
services rendered to the indemnifying party in connection with this Sublease.
19. Insurance. Sublessee shall during the entire Term of this Sublease,
---------
maintain all insurance policies required by Sublessor to be maintained under the
Master Lease in accordance with the terms of the Master Lease to the extent
applicable to the Subleased Premises. Sublessee shall name Sublessor as an
additional insured on all such policies in which Master Landlord is also named
as an additional insured.
20. ADA Compliance. Sublessee shall, at its sole cost and expense, cause the
--------------
Subleased Premises to comply at all times with the requirements of the Americans
With Disabilities Act (42 U.S.C. (S) 12181 et seq.), the regulations now or
hereafter adopted pursuant thereto, and any and all applicable state or local
laws, statutes, ordinances, rules and regulations concerning public
accommodations for disabled persons now or hereafter in effect. Sublessee shall
indemnify, defend (with counsel approved by Sublessor) and hold Sublessor
harmless from and against any and all claims, judgments, damages, penalties,
fines, costs, liabilities and losses (including, without limitation, reasonable
attorneys' fees and disbursements) arising from Sublessee's failure to comply
with this Article.
21. Parking. In connection with the Subleased Premises, Sublessee shall be
-------
entitled to use one hundred thirty-eight (138) unreserved parking spaces located
adjacent to the Building.
22. Signage and Directory. Subject to the terms and conditions of the Master
---------------------
Lease and the express approval of Master Landlord, Sublessee, at Sublessee's
sole cost and expense, shall be permitted to install a signs identifying
Sublessee on or about the Subleased Premises and the Building. All such signage
shall be subject to all applicable building codes and all rules and regulations
promulgated by Master Landlord. During the Term of this Sublease, Sublessee, at
Sublessee's sole cost and expense, shall maintain such signage to Master
Landlord's and Sublessor's reasonable satisfaction. Upon the expiration or
early termination of this Sublease, Sublessee, at Sublessee's sole cost and
expense, shall remove all such signage and repair to Master Landlord's and
Sublessor's satisfaction any damage occasioned by the installation and removal
of such signage.
23. Notices. All notices and demands which may or are required to be given by
-------
either party to the other hereunder shall be in writing and shall be personally
delivered or sent by United States certified or registered mail, postage
prepaid, return receipt requested, or sent by reputable overnight courier (such
as Federal Express, UPS or DHL with delivery confirmation) and addressed as
follows:
TO SUBLESSOR: CREATIVE COMPUTERS, INC.
2555 West 190th Street
Torrance, California 90504
Attn: Chief Financial Officer
With a copy to: MORRISON & FOERSTER LLP
19900 MacArthur Boulevard
Suite 1200
Irvine, California 92612
Attention: William B. Tate II, Esq.
9
<PAGE>
TO SUBLESSEE: uBID, INC.
2525 Busse Highway
Elk Grove Village, Illinois 60007
Attn: Chief Financial Officer
All notices shall be deemed to have been received at the time of delivery, if
personally delivered, or three (3) business days after deposit in the United
States mail as specified above, if mailed or one (1) business day if sent by
overnight courier for next business day delivery. Either party may from time to
time change the address for delivery of notices and demands by giving notice of
such change as specified above. Sublessor shall promptly provide Sublessee with
a copy of any notice of default under the Master Lease and any notice relating
to the Subleased Premises received by Sublessor from Master Landlord. Sublessee
shall forward concurrently to Sublessor any notices sent or received from Master
Landlord relating to the Subleased Premises.
24. Hold Over. In the event of any holding over without the consent of
---------
Sublessor beyond the end of the term, this Sublease shall be deemed a tenant at
sufferance upon the covenants and conditions herein contained and upon payment
of (i) 150% the monthly rental last paid by Sublessee and (ii) prompt
reimbursement to Sublessor of all loss, cost, expense and consequential damages
incurred by Sublessor as a result of such continued tenancy.
25. Captions. The captions of sections of this Sublease are not a part of this
--------
Sublease and shall have no effect upon the construction or interpretation of any
part hereof.
26. Successors and Assigns. The covenants and conditions herein contained,
----------------------
subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators, legal representatives and assigns of the
parties hereto.
27. Attorneys' Fees. In the event of any legal action or proceeding brought by
---------------
either party against the other arising out of this Sublease (an "Action"), the
prevailing party shall be entitled to the payment by the losing party of its
reasonable attorneys' fees, court costs and litigation expenses, as determined
by the court.
28. Post-Judgment Attorneys' Fees. The prevailing party in any Action shall be
-----------------------------
entitled, in addition to and separately from the amounts receivable under
Section 27 above, to the payment by the losing party of the prevailing party's
- ----------
reasonable attorneys' fees, court costs and litigation expenses incurred in
connection with (a) any appellate review of the judgment rendered in such Action
or of any other ruling in such Action, and (b) any proceeding to enforce a
judgment in such Action. It is the intent of the parties that the provisions of
this Section 28 be distinct and severable from the other rights of the parties
----------
under this Lease, shall survive the entry of judgment in any Action and shall
not be merged into such judgment.
29. Gender and Number. Wherever the context so requires, each gender shall
-----------------
include any other gender, and the singular number shall include the plural and
vice-versa.
30. Cumulative Remedies. No remedy or election hereunder shall be deemed
-------------------
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
31. Separability. Any provision of this Sublease which shall prove to be
------------
invalid, void or illegal shall. in no way affect, impair, or invalidate any
other provision hereof and all such other provisions shall remain in full force
and effect.
32. Effectiveness. This Sublease shall become effective when executed by all
-------------
the parties hereto. In the event Master Landlord, however fails to expressly
consent to the same within the Approval Period, this Sublease shall terminate.
Sublessor shall return to Sublessee the initial payment of Basic Rent delivered
to Sublessor concurrently with the execution hereof by Sublessee, and the
parties hereto shall have no further obligation or liability to the other. This
Sublease may be executed by telefacsimile.
10
<PAGE>
33. Quiet Enjoyment. Upon Sublessee paying all Basic Rent, Additional Rent and
----------------
other charges due hereunder and observing and performing all of the covenants,
conditions and provisions to be performed by Sublessee hereunder, Sublessee
shall have quiet possession of the Subleased Premises for the entire term
hereof, subject to all of the provisions of this Sublease.
34. Time of the Essence. Time is of the essence of each provision of this
-------------------
Sublease where time is an element.
35. Counterparts. This Sublease may be executed in counterparts, each is
------------
hereby declared to be an original; all, however constitute but one and the same
agreement.
IN WITNESS WHEREOF, the parties have executed this Sublease on the date
first above written.
Executed at ________________________ CREATIVE COMPUTERS, INC.,
on __________ ___, 1998 a California corporation
By:____________________________________
Name:_____________________________
Title:____________________________
By:____________________________________
Name:_____________________________
Title:____________________________
"Sublessor" (Corporate Seal)
Executed at ________________________ uBID, INC., a Delaware corporation
on __________ ___, 1998
By:____________________________________
Name:_____________________________
Title:____________________________
By:____________________________________
Name:_____________________________
Title:____________________________
"Sublessor" (Corporate Seal)
11
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EXHIBIT "A-1"
Subleased Premises
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EXHIBIT "A-1"
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EXHIBIT "A-2"
Initial Subleased Premises
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EXHIBIT "A-2"
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EXHIBIT "B"
Master Lease
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EXHIBIT "B"
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EXHIBIT 10.11
SOFTWARE PURCHASE AGREEMENT
This Software Purchase Agreement ("Agreement") is entered into by and between
[*] ("[*]") and Creative Computers, Inc., a Delaware corporation ("Creative")
this 10th day of December, 1997 and is made with reference to the following
facts:
A. On February 2, 1997 [*] and Creative entered into a Custom Software
Development Agreement ("CSDA") for the design of an on-line auction system.
Under the terms of the CSDA, Creative and [*] acquired joint ownership of
the source code developed by [*] for the project.
B. Under the terms of the CSDA, Creative was also granted a license to the
auction general purpose libraries for web site or Java software development
including those associated and owned by [*] and third parties.
C. Creative now desires to purchase and acquire ownership of the source code
for such general purpose libraries to the extent developed, owned, and
maintained by [*] and as it relates to the online auction system ("Source
Code") on the following terms and conditions.
AGREEMENT
1. In consideration for the payment by Creative of the sum of [*] ($[*]), [*]
agrees to and hereby does grant and convey to Creative a joint ownership
interest in and to the Source Code. Must be paid by 12/12/97.
2. The parties shall jointly own all patent, copyright, and other proprietary
rights with respect to the Source Code. Accordingly, each party shall have
the right to reproduce, use, modify, distribute, and sell the Source Code
without any obligation of accounting to the other party.
3. In addition, [*] shall provide Creative with 40 hours of consulting in
connection with the on-line auction system at Creative's office in
Torrance, California.
4. [*] warrants and represents that it is the rightful owner of all rights in
and to the Source Code which rights have not been previously sold,
assigned, transferred or otherwise alienated or impaired. [*] agrees to
defend and indemnify Creative against any and all claims of copyright,
trademark, patent infringement, or
__________
* [Confidential treatment requested.]
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other claims by any party arising out of or related to Creative's sale,
distribution, modification, or other use of the Source Code.
5. At the request of Creative, [*] agrees to execute or join in executing
all papers or documents, without charge to Creative, required for the
filing of patent applications, trademark registration applications, or
copyright registration applications with respect to the Source Code in
the United States and in such foreign countries as Creative may elect and
will provide Creative with all reasonable assistance in the preparation
and prosecution of such applications and shall do all that may be
reasonably necessary to establish, protect, and maintain the rights of
Creative in such inventions, applications, and the like in accordance
with this Agreement.
6. If the Source Code becomes the subject of a claim of infringement or
misappropriation of a patent, copyright, any such patent or other
proprietary right of any third party, or if a temporary restraining order
or other injunctive relief is entered against the use of part or all of
the Source Code, [*] in addition to its obligations set forth above,
shall use its best efforts to either:
a. promptly replace such Source Code with compatible non-infringing
Source Code; or
b. promptly modify the Source Code to make it non-infringing without
materially impairing the ability to use the Source Code as
intended; or
c. promptly protect the right of Creative to continue using the Source
Code; or
d. if none of the foregoing alterations is reasonably available to
[*], promptly pay to Creative all of the monies paid and costs and
expenses incurred by Creative that relate to the development, use
and cessation of use of the Source Code. But in no event shall [*]
be required to pay an amount in excess of $18,000 - eighteen
thousand dollars.
[*] CREATIVE COMPUTERS, INC.
/s/ SIMON ABUYOUNES
- ------------------------------------ --------------------------------------
By: /s/ ^^ILLEGIBLE SIGNATURE^^ By: Simon Abuyounes
--------------------------------- -----------------------------------
Its: President Its: VP of Internet Technical Services
-------------------------------- ----------------------------------
Date: 12/10/97 Date: 12/11/97
------------------------------- ---------------------------------
__________
* [Confidential treatment requested.]
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EXHIBIT 10.12
[CREATIVE COMPUTERS LETTERHEAD]
September 9th, 1998
David Matthews
Dear Dave:
I appreciate your willingness to confirm a few items that we discussed
regarding the auction system software.
First, with respect to the source code libraries (including the World Side
Cafe java packages) that you had developed prior to beginning your work on the
auction system software in February 1997, you grant Creative joint ownership
rights, without the obligation of accounting, in such source code libraries.
Second, with respect to the auction system software and related work
product (for example, design documentation, flow charts, manuals) that you
developed beginning in February 1997, you grant Creative joint ownership rights,
without the obligation of accounting, in such software and other work product.
Finally, all the computer software and related work product you developed
for Creative beginning in December 1997 before you became a UBID employee in
February 1998, was done on a work for hire basis for Creative. Therefore,
Creative owns all right, title, and interest in all such computer software and
other work product. To the extent you have any rights in such software and
other work product, you assign all right, title, and interest in such software
and other work product to Creative.
Thank you again for your cooperation in this matter.
Sincerely,
/s/ Simon Abuyounes
Simon Abuyounes
Agreed:
/s/ David Matthews
David Matthews
Dated:
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EXHIBIT 10.13
ASSIGNMENT AND LICENSE AGREEMENT
This Assignment and License Agreement (this "Agreement") is made as of
November __, 1998 (the "Effective Date") by and between Creative Computer, Inc.,
("Creative"), a Delaware corporation, and uBID, Inc. ("uBID"), a Delaware
corporation (collectively the "Parties").
RECITAL
WHEREAS, Creative has delivered to uBID certain software for online
Internet-based system for auctioning computer equipment;
WHEREAS, Creative wishes to assign to uBID certain rights to such software
as set forth herein;
NOW THEREFORE, the Parties hereby agree as follows:
AGREEMENT
1. DEFINITIONS
For the purposes of this Agreement, the following terms shall have the meanings
ascribed to them as follows:
1.1 "Subject Software" shall mean the computer software developed by
Creative employees and by third-party developers under contracts
between Creative and such developers and delivered to uBID prior to
the Effective Date relating to the online auctioning of computer,
electronics and home and leisure products, including, without
limitation, all user manuals, reference manuals and other
documentation and materials relating thereto; any derivative works,
fixes, upgrades, updates, enhancements or new versions thereof, in
existence as of the Effective Date.
1.2 "Generic Software" shall mean those portions of the Subject Software,
including but not limited to source code subroutines, that are not
specific to the operation of uBID's current online Internet-based
system for auctioning of computer, electronics and home and leisure
products, but can be (with or without modification) used for other
functions.
2. ASSIGNMENT
For good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, Creative hereby assigns, conveys, grants and transfers and
agrees to assign, convey, grant and transfer to uBID all of its right, title,
and interest in the copyrights in the Subject Software, including the right to
make derivative works thereof, the right to use the designs, techniques,
inventions, and concepts embodied therein, and all rights to causes of action
and remedies related thereto (including, without limitation, the right to sue
for past infringement or violation of rights related to the foregoing), provided
that, Creative retains the right to continue using in its business the ideas,
inventions, knowhow, and other technology (including but not limited to computer
software design or expression) that is part of the general knowledge of Creative
employees without reference to any tangible material.
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Upon uBID's request and at uBID's expense, Creative shall take all commercially
reasonable steps, including without limitation, the prompt execution and
delivery of documents in recordable form, to vest all of Creative's copyrights
to the Subject Software in uBID.
3. LICENSE GRANT
uBID hereby grants to Creative a nonexclusive, transferable, assignable,
royalty-free, world-side, irrevocable, perpetual license, with the right to
sublicense, to reproduce, prepare derivative works of, and distribute the
Generic Software.
4. DISCLAIMER OF WARRANTIES
CREATIVE DISCLAIMS ALL WARRANTIES, WHETHER EXPRESS, IMPLIED, STATUTORY, OR
OTHERWISE, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE, TITLE, OR NON-INFRINGEMENT OF THIRD-PARTY
RIGHTS. NO REPRESENTATION OR OTHER AFFIRMATION OF FACT, INCLUDING BUT NOT
LIMITED TO STATEMENTS REGARDING THE PERFORMANCE OF SOFTWARE, THAT IS NOT
CONTAINED IN THIS AGREEMENT SHALL BE BINDING ON EITHER PARTY. UBID ACKNOWLEDGES
THAT THE SERVICES WERE PERFORMED FOR IT IN THE PAST, THAT IT HAS ALREADY HAD AN
OPPORTUNITY TO ACCEPT OR REJECT THE SUBJECT SOFTWARE, AND THAT IT TAKES THE
SUBJECT SOFTWARE ON AN "AS IS" BASIS.
5. LIMITATION OF LIABILITY
In no event shall either Party be liable to the other for any special,
consequential, incidental, indirect, or punitive damages of any kind (including,
without limitation, lost revenues or profits, loss of business, or loss of data)
whether or not informed in advance of the possibility of such loss, however
caused, whether for breach or repudiation of contract, breach of warranty,
negligence, or otherwise.
6. MISCELLANEOUS
6.1 This Agreement will be governed by and construed in accordance with
the laws of California, without reference to its choice of law rules.
6.2 If any provision of this Agreement is determined to be invalid or
unenforceable, the validity or enforceability of the other provisions
or of this Agreement as a whole shall not be affected; and, in such
event, such provision shall be changed and interpreted so as best to
accomplish the objectives of such provision within the limits of
applicable law or applicable court decision.
6.3 This Agreement serves to document formally the entire understanding
between the parties relating to the subject matter hereof, and
supersedes and replaces any
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prior or contemporaneous agreements, negotiations or understandings
(whether oral or written), relating generally to the same subject
matter.
6.4 No amendment or modification of any provision of this Agreement shall
be effective unless in writing and signed by a duly authorized
signatory of the party against which enforcement of the amendment or
modification is sought.
6.5 This Agreement, together with all rights and obligations hereunder,
may be assigned or transferred without limitation.
6.6 This Agreement shall be binding upon the Parties and shall inure to
the benefit of the Parties and their successors and assigns.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives as of the Effective Date.
Creative Computers, Inc. uBID, Inc.
By: By:
------------------------------ -------------------------------
Name (Print): Name (Print):
-------------------- ---------------------
Title: Title:
--------------------------- ----------------------------
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated November 16,
1998 (except Note 7, as to which the date is November 30, 1998), in Amendment
No. 4 to the Registration Statement (Form S-1) and related Prospectus of uBid,
Inc. for the registration of 1,817,000 shares of its common stock.
/s/ Ernst & Young LLP
Chicago, Illinois
November 16, 1998, except as to
Note 7 as to which the date is
November 30, 1998
