<PAGE>
As filed with the Securities and Exchange Commission on August 31, 1999
Registration No. 333-83319
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
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 Number)
</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
Chief Executive Officer
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. Gregory K. Miller
Craig S. Mordock Andrew S. Williamson
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 in 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,
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 Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it is not soliciting an offer to buy +
+these securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated August 31, 1999
PROSPECTUS
2,000,000 Shares
[LOGO OF uBID APPEARS HERE]
Common Stock
-----------
We are selling 2,000,000 shares of our common stock. Our shares are listed
for trading on the Nasdaq National Market under the symbol "UBID." On August
27, 1999, the last reported sale price for our common stock was $21 15/16.
Investing in our common stock involves risks which are described in the "Risk
Factors" section beginning on page 5 of this prospectus.
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price.................................. $ $
Underwriting discount.................................. $ $
Proceeds, before expenses, to uBid..................... $ $
</TABLE>
The underwriters may also purchase up to an additional 300,000 shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
-----------
Merrill Lynch & Co.
Banc of America Securities LLC
William Blair & Company
Wit Capital Corporation
-----------
The date of this prospectus is , 1999.
<PAGE>
DESCRIPTION OF INSIDE FRONT COVER OF PROSPECTUS:
The following text appears in a banner at the top of the page: "Innovation in
eCommerce."
Graphic: uBid home page appears on the right side of the page.
Text: "uBid operates an online auction marketplace offering brand name
products to both consumers and businesses. We provide buyers the opportunity to
set their own prices on popular products at significant discounts to prices
found through traditional channels. Our auctions currently feature a rotating
selection of brand name computers, consumer electronics, housewares, sporting
goods and memorabilia, and jewelry. We believe our compelling value proposition
and unique buying experience can be extended to virtually all product
categories. We run auctions 24 hours a day, seven days a week, currently
offering on average over 3,000 items in each of our daily auctions."
Graphic: uBid/Sports and Recreation web page appears on the left
side of the page.
Text: "The uBid Solution...
. Compelling Value Proposition for Customers
. Highly Efficient Channel for Suppliers
. Broad Product Offering
. Extensive Merchandising Experience"
"New Initiatives...
. uBid Auction Community
. International Markets
. Business-to-Business
. Co-Branding Relationships"
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Forward-Looking Statements............................................... 19
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Price Range of Our Common Stock.......................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Financial Data.................................................. 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 31
Management............................................................... 43
Principal Stockholders................................................... 51
Certain Transactions..................................................... 53
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 62
Underwriting............................................................. 63
Legal Matters............................................................ 66
Experts.................................................................. 66
Where You Can Find More Information...................................... 66
Index to Financial Statements............................................ F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
This prospectus contains estimates of market growth related to the
Internet. These estimates have been included in studies published by Forrester
Research and International Data Corporation, which are market research firms.
These estimates assume that certain events, trends and activities will occur.
These firms do not guarantee the accuracy or completeness of their information
and estimates. We have not independently verified the information and
assumptions on which these market growth estimates are based. If these firms
are wrong about any of their assumptions, then their market estimates may also
be wrong.
uBidSM is a registered service mark and uBid Auction Community(TM) is a
trademark of uBid, Inc. This prospectus also contains registered service marks
and/or trademarks of other entities.
<PAGE>
PROSPECTUS SUMMARY
This summary does not contain all of the information that may be
important to you. You should read the entire prospectus carefully, including
the financial data and related notes, before making an investment decision. The
terms "we," "us" and "our" mean uBid, Inc. Unless otherwise indicated, all
information in this prospectus assumes that the underwriters do not exercise
their over-allotment option.
uBid, Inc.
uBid operates an online auction marketplace offering brand name products
to both consumers and businesses. We provide buyers the opportunity to set
their own prices on popular products at significant discounts to prices found
through traditional channels. In addition, our online auctions provide
suppliers with an inexpensive and highly efficient channel for maximizing
revenue by selling excess or unique products on a timely basis, while
preserving their primary distribution channels. Our auctions currently feature
a rotating selection of brand name computers, consumer electronics, housewares,
sporting goods and memorabilia, and jewelry. We believe our compelling value
proposition and unique buying experience can be extended to virtually all
product categories.
We run auctions 24 hours a day, seven days a week, currently offering on
average over 3,000 total items in each of our daily auctions. From our first
auction in December 1997 through June 30, 1999, we auctioned over 787,000
merchandise units, registered over 533,000 users and recorded more than 54
million visits to our Website. Our broad product offerings and reduced prices
attract customers, which in turn makes our site an attractive channel for
vendors. We have developed a sophisticated auction management process that
allows us to capture detailed information concerning customer buying patterns,
enabling us to optimize our purchasing decisions to control margins.
Our objective is to leverage our technology, brand name and customer base
to enhance our position as a leading online auction marketplace for consumers
and businesses. The key elements of our strategy are:
. Continue to Increase Traffic to Our Site. We are augmenting our online
advertising to increase traffic with an off-line advertising campaign
highlighting the unique buying experience we offer our customers. In
addition, we will continue to increase repeat visits through customer
loyalty programs and our "My Page" feature, and introduce additional
co-branded auction sites like the one we are developing with LookSmart.
. Enter Additional Markets. We are expanding our auction model into the
business-to-business market. We have broadened our product categories
and supplier base through the introduction of the Auction Community and
will continue to expand our model into international markets.
. Broaden Category Offerings. We are continuing to expand the lines of
merchandise we offer and have recently added housewares, sporting goods
and memorabilia, and jewelry. We believe our unique buying experience
can be extended to virtually all product categories.
. Increase Revenue Sharing and Commission Based Arrangements. Revenue
sharing arrangements, in which we split sales proceeds with suppliers
at an agreed-upon percentage, increase margin opportunity for suppliers
and ensure gross margin percentage for us. In the second quarter of
1999, we had received approximately 13% of our revenue from these
agreements and expect to increase this percentage as we continue to
enter into more of these arrangements.
1
<PAGE>
Our company was established by Creative Computers in April 1997 and was
incorporated in September 1997 as a wholly-owned subsidiary of Creative. In
December 1998, we completed an initial public offering of 1,817,000 shares of
our common stock, leaving Creative with ownership of approximately 80.1% of the
outstanding shares of our common stock. In June 1999, Creative spun off all of
those shares to its stockholders through a tax-free distribution.
Our executive offices are located at 2525 Busse Road, Elk Grove Village,
Illinois 60007, and our telephone number at that location is (847) 860-5000.
Information contained on our Website at www.ubid.com does not constitute part
of this prospectus.
Recent Developments
Business-to-Business Initiatives. We recently entered into agreements
with Cahners Business Information, a division of Reed Elsevier, Inc., and
Surplus Record, Inc. to create co-branded Websites that provide auction
services for industrial equipment. Cahners publishes 128 business magazines and
provides 16 business communities with online services, custom publishing,
directories, research and direct mail lists. Our agreement with Cahners
initially covers a select group of Cahners' trade magazines and Websites in the
foodservice, printing, packaging and paper equipment industries. Surplus Record
publishes a monthly periodical and Website offering for sale industrial,
manufacturing and electrical machinery. These co-branded auction Websites will
allow businesses to auction products over the Internet more efficiently. We
believe that our auction capabilities and nationwide reach will help create a
centralized marketplace for the product categories covered by these
publications.
uBid Auction Community. In May 1999, we launched the uBid Auction
Community, which enables approved suppliers to directly place products for
auction on the uBid Website. uBid acts as agent for any transactions and
receives a commission on the sale. The Auction Community is designed to aid
smaller suppliers that would typically not have the scale and technology to
create and operate their own auction sites.
New Product Categories. We are continuing to expand our product lines to
develop new revenue streams. Our recently introduced product categories are
housewares, sporting goods and memorabilia, and jewelry. In March 1999, we
signed an agreement with Digital River that will allow customers to purchase
and quickly download software from our Website.
New Markets. We recently entered into an agreement with LibertyOne, an
Australian media company, to provide LibertyOne access to our auction
technology and brand name in exchange for a licensing fee, payments for
professional services and future royalties from its auction sales in Australia
and New Zealand, with an option to expand into various Southeast Asian markets.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by uBid............... 2,000,000 shares
Common stock to be outstanding 11,170,884 shares. This figure is
after this offering....................... based on 9,170,884 shares
outstanding at August 27, 1999
and excludes approximately
2,397,223 shares of common stock
issuable upon exercise of stock
options outstanding at August 27,
1999 (of which 357,784 are vested
and exercisable at August 27,
1999). The outstanding stock
options have a weighted average
exercise price of $18.78 per
share.
Use of proceeds............................ For general corporate purposes,
including working capital,
capital expenditures, sales and
marketing, investments in systems
and infrastructure, and potential
acquisitions.
Risk factors............................... See "Risk Factors" for a
discussion of factors you should
carefully consider before
deciding to invest in our common
stock.
Nasdaq National Market symbol.............. UBID
</TABLE>
3
<PAGE>
Summary Financial Data
<TABLE>
<CAPTION>
Period From
April 1, 1997
(Inception) to Year Ended Six Months Ended
December 31, December 31, June 30,
-------------- ------------ ---------------------------
1997 1998 1998 1999
-------------- ------------ ----------- --------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Statements of Operations
Data:
Net revenues............ $ 9 $ 48,232 $ 8,826 $ 79,907
Gross profit............ 1 3,975 680 6,945
Loss from operations.... (287) (9,999) (1,801) (8,928)
Net loss................ (313) (10,169) (1,888) (8,514)
Basic and diluted net
loss per share(1)...... $ (0.04) $ (1.36) $ (0.26) $ (0.93)
Shares used in computing
basic and diluted net
loss per share(1)...... 7,329,883 7,461,061 7,329,883 9,146,883
<CAPTION>
June 30, 1999
---------------------------
Actual As Adjusted(2)
----------- --------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 20,780 $ 61,423
Working capital......... 13,528 54,171
Total assets............ 33,541 74,184
Note payable to
Creative............... 3,331 3,331
Total stockholders'
equity................. 11,938 52,581
</TABLE>
- --------
(1) See Notes 1 and 5 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 and Note 5 for an explanation of the
non-cash charge recorded in the fourth quarter of 1998 and the first half
of 1999 in connection with certain employee and director stock options
granted prior to our initial public offering.
(2) Adjusted to reflect the sale of 2,000,000 of our shares in this offering at
an assumed public offering price of $21.94 per share and our receipt of the
estimated net proceeds after deducting the estimated underwriting discounts
and commissions and offering expenses.
4
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in our common stock. If any of the following risks actually
occur, our business, prospects, financial condition and results of operations
could be materially adversely affected. This could cause the trading price of
our stock to decline, and you may lose all or part of your investment.
This prospectus contains forward-looking statements that involve risks
and uncertainties, including statements about our future plans, objectives,
intentions and expectations. Many factors, including those described below,
could cause actual results to differ materially from those discussed in any
forward-looking statements.
We have a limited operating history and may experience risks encountered by
early-stage companies
We began conducting auctions on the Internet in December 1997.
Accordingly, we have a very limited operating history for you to use in
evaluating our business. Our business and prospects must be considered in light
of the risks, expenses and difficulties that companies encounter in the early
stages of development, particularly companies in new and rapidly evolving
markets like the Internet. These risks include our ability to:
. manage our growth effectively;
. anticipate and adapt to the rapid changes that characterize our
market;
. maintain and increase levels of traffic to our Website;
. continue to develop and upgrade our technology and customer service;
. offer products for auction that will meet consumer demand;
. expand our supplier network;
. respond to competitive developments in our market; and
. continue to identify, attract, retain and motivate qualified
personnel.
We are subject to restrictions on our ability to issue equity securities, which
may limit our ability to grow our business and compete effectively
In June 1999, Creative Computers completed a spin-off of our stock to its
stockholders, which was structured as a tax-free spin-off under Section 355 of
the Internal Revenue Code. Section 355(e) 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 our
sale of additional equity securities will not cause the spin-off to lose its
tax-free status for federal income tax purposes, we have agreed to various
restrictions on our ability to issue or repurchase our equity securities until
three years following the spin-off that are more limiting than the 50%
restriction imposed under Section 355(e). In connection with the spin-off, we
agreed that we will not take the following actions without permission of
Creative or unless we obtain a favorable IRS letter ruling that such actions
will not affect the tax-free status of the spin-off:
. until June 8, 2001, we will not issue common stock and other equity
securities that would cause the number of shares of common stock
distributed by Creative in the spin-off to constitute less than 60%
of our outstanding common stock; and
. after this period until June 8, 2002, we will not issue additional
shares of common stock and other equity securities that would cause
the number of shares of our common stock distributed by Creative in
the spin-off to constitute less than 55% of our outstanding common
stock.
5
<PAGE>
While the issuance of shares in the initial public offering and this
offering should not affect the tax-free nature of the spin-off, the absence of
final IRS regulations under Section 355(e) has created some uncertainty as to
the application of these rules to the distribution by Creative of our common
stock. As a result, we requested and have received Creative's consent to this
offering, as well as an opinion from our outside tax advisors,
PricewaterhouseCoopers LLP, that this offering should not result in the
application of Section 355(e) with respect to the spin-off. After this
offering, particularly in light of this uncertainty, and pending final
regulations that provide more lenient restrictions, we will be limited for at
least the next two years in our ability to issue additional equity securities
or options to raise capital, acquire other companies or retain or recruit key
employees. The same restrictions will be generally applicable to any proposed
repurchases of our common stock. The restrictions described above will not
preclude us from issuing debt securities that are not convertible into common
stock or other equity securities. A copy of the opinion described above has
been filed as an exhibit to the registration statement of which this prospectus
is a part. See "Certain Transactions--Tax Indemnification and Allocation
Agreement."
We have agreed to indemnify Creative for any tax liability suffered by
Creative arising out of actions by us after the distribution that would cause
the distribution to lose its qualification as a tax-free distribution or to be
taxable to Creative for federal income tax purposes. If the spin-off were
taxable due to our actions, we would face a very large indemnity obligation to
Creative, which would have a significant material adverse effect on our
business and financial condition and may even exceed all of our available
capital resources. The existence of this contingent indemnity obligation,
particularly because it may be affected to some degree by any material
corporate transaction involving us, may make us a less attractive acquisition
or merger candidate until the uncertainties of Section 355 are resolved or the
restrictions described above expire.
We require substantial working capital to fund our business. Our working
capital requirements and cash flow from operating activities vary from quarter
to quarter, depending on revenues, operating expenses, capital expenditures and
other factors. We have experienced negative cash flow from operations and
expect this to continue for the foreseeable future. We believe that the
proceeds of this offering, together with our existing capital resources, will
be sufficient to meet our capital requirements through at least the next 12
months. If our capital requirements vary materially from those currently
planned, we may require additional financing sooner than anticipated. If we are
unable to obtain financing in the amounts desired and on acceptable terms, or
at all, we may be required to reduce significantly the scope of our presently
anticipated advertising and other expenditures, which could harm our growth
prospects and adversely affect the price of our stock.
We anticipate continued losses and we may never become profitable
We have invested heavily in our technology, Website development,
advertising, hiring of personnel and startup costs. As a result, we have
incurred significant net losses since our inception and we expect to continue
to incur losses for the foreseeable future. We had an accumulated deficit of
approximately $19.0 million at June 30, 1999. We intend to expend significant
financial and management resources on:
. developing our brand;
. marketing and advertising our business;
. developing our Website;
. building and maintaining strategic relationships; and
. developing and improving our technology and operating infrastructure.
We also expect to incur additional losses as a result of our significant
increase in marketing and promotional expenses. Because we historically have
operated at a loss, our ability to achieve profitability given
6
<PAGE>
our planned investment levels depends upon our ability to generate and sustain
substantially increased levels of net revenue. In addition, we plan to continue
to increase our operating expenses significantly to:
. increase our customer base;
. increase the size of our staff;
. expand our marketing efforts to enhance our brand image;
. increase our visibility on other companies' high-traffic Websites;
. purchase larger volumes of merchandise to be sold at auction;
. increase our software development efforts; and
. support our growing infrastructure.
We will need to generate significantly increased revenues to achieve
profitability, particularly if we are unable to adjust our expenses and
increase our profit margins. In particular, computer products have been
vulnerable to decreased margins as a result of competitive pressures. We
derived 77% of our revenues from the sale of computers and related products in
the second quarter of 1999. We cannot assure you that we will ever achieve or
sustain profitability.
We have made and expect to continue to make significant investments in
infrastructure and personnel in advance of levels of revenue necessary to
offset these expenditures. As a result, these expenditures are based on our
operating plans and our estimates of future revenues. Our sales and operating
results generally depend, among other things, on the volume and timing of
orders we receive, which are difficult to forecast. We may be unable to adjust
our spending to compensate for any unexpected revenue shortfall.
Beginning in October 1997, we granted stock options that were exercisable
only in the event of a successful initial public offering of our stock or sale
of our company. We expect to record a non-cash compensation charge of $13.3
million over the five-year vesting period of the options. We recorded
$5.3 million of this charge in the fourth quarter of 1998 and $1.8 million for
the six months ended June 30, 1999. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 5 to the notes to
the financial statements.
Revenue growth in prior periods may not be indicative of our future growth
We have achieved significant revenue growth since our inception in 1997.
However, our limited operating history makes it difficult to predict future
growth. In addition, our operating results may fluctuate significantly in the
future, which prevents the meaningful use of period-to-period comparisons of
our financial results. Accordingly, you should not rely on past revenue growth
rates as a prediction of our future growth.
Our financial results fluctuate and may be difficult to forecast
Our quarterly revenues, expenses and operating results are unpredictable.
We expect that our operating results will continue to fluctuate in the future
due to a number of factors, some of which are beyond our control. These factors
include:
. our ability to increase our customer base, manage our inventory mix
and the mix of products we are able to offer at auction;
. our ability to sell products at auction at the price targets we set;
. our ability to control our gross margins;
. our ability to sell our inventory in a timely manner and maintain
customer satisfaction;
7
<PAGE>
. the availability and pricing of merchandise from suppliers;
. product obsolescence and price erosion;
. consumer confidence in encrypted transactions in the Internet
environment;
. our ability to obtain cost effective advertising on other entities'
Websites;
. the effectiveness of off-line advertising in generating additional
traffic to our Website;
. the amount and timing of costs relating to expansion of our
operations;
. our ability to introduce new types of merchandise, service offerings
or customer services in a competitive environment;
. technical difficulties consumers might encounter in using our
Website;
. delays in shipments as a result of computer systems failures, strikes
or other problems with our delivery service or credit card processing
providers;
. the amount of returns of our merchandise; and
. general economic conditions and economic conditions specific to the
Internet and electronic commerce.
To respond to competitive pressures in our market, we may from time to
time make service, marketing or supply decisions or acquisitions that could
adversely affect our quarterly operating results. Like other retailers, we may
experience seasonality in our business. Due to all of these factors, our
operating results may fall below the expectations of securities analysts and
investors. This could cause a decline in the trading price of our stock.
We may not be successful in developing brand awareness, and the failure to do
so could significantly harm our business and financial condition
We believe 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 our ability to increase our customer
base. If suppliers do not perceive us as an effective marketing and sales
channel for their merchandise, or if consumers do not perceive us as offering
an entertaining and desirable way to purchase merchandise, we will be
unsuccessful in promoting and maintaining our brand. In order to attract and
retain customers and promote our brand, we expect to increase our marketing and
advertising budgets. If we are unable to successfully promote our brand or
achieve a leading position in Internet commerce, our business could be
significantly harmed.
Our business model is unproven and evolving
We are continuing to expand the breadth and depth of products and
services we offer on our Website. In addition, we recently entered into
agreements to expand our auction model to include the business-to-business
market. We have expanded our business model and the use of our Website as an
advertising medium for services and products of other companies and for
promoting new or complementary products and sales formats. In addition, we
continue to offer credit to some of our business customers that have been pre-
qualified as having appropriate credit ratings. As our business model evolves,
we risk diluting our brand, confusing customers and decreasing interest from
suppliers. In addition, we could be exposed to additional or new risks
associated with these new opportunities. If we are unable to address these
risks, our business will be harmed.
8
<PAGE>
Our failure to remain competitive may significantly hinder our growth
The electronic commerce market is rapidly evolving and intensely
competitive, and we expect competition to intensify in the future. We compete
with a variety of other companies depending on the type of merchandise and
sales format they offer to customers. These competitors include:
. various Internet auction houses such as Amazon.com Auctions, eBay,
ONSALE, Yahoo! Auctions, First Auction, Surplus Auction, Bid.com,
WebAuction and Insight Auction;
. 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,
Cendant, BUY.COM and Shopping.com;
. a variety of other companies that offer merchandise similar to ours
through physical auctions, with which we compete for sources of
supply;
. personal computer manufacturers that have their own direct
distribution channels for their excess inventory or refurbished
products; and
. companies with substantial customer bases in the computer and
peripherals catalog business, including CDW Computer Centers, PC
Connection and Creative Computers, some of which already sell online
or may devote more resources to Internet commerce in the future.
Some of our current and potential competitors have established or may
establish cooperative relationships among themselves or directly with suppliers
to obtain exclusive or semi-exclusive sources of merchandise. In addition,
there has been consolidation in our industry, which may continue in the future.
Accordingly, it is possible that new competitors or alliances among competitors
and suppliers may emerge and rapidly acquire market share. In addition,
manufacturers may elect to sell their products directly. Increased competition
is likely to reduce our operating margins, cause us to lose market share or
diminish our brand. If any of these things occur, our business would be
significantly harmed.
Many of our current and potential competitors have significantly greater
financial, marketing, customer support, technical and other resources than we
do. As a result, these competitors may be able to secure merchandise from
suppliers on more favorable terms than we can. They may be able to respond more
quickly to changes in customer preferences or devote greater resources to
developing and promoting their merchandise.
We rely on our relationships with other online companies to drive traffic to
our Website and promote our brand
We depend to some extent on relationships with other online companies and
expect that our dependence on these relationships will increase in the future.
These relationships include:
. portal arrangements and agreements for anchor tenancy on other
companies' Websites;
. promotional placements;
. sponsorships; and
. banner advertisements.
Generally, these arrangements have terms for up to three years, are not
exclusive, do not provide for guaranteed renewal and may be terminated by us
without cause. Our dependence on these relationships includes the following
risks:
. competitors may purchase exclusive rights to attractive space on one
or more key sites;
. significant spending on these relationships may not increase our
revenues in the time periods we expect or at all;
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. space on other Websites may increase in price or cease to be
available to us on reasonable terms or at all;
. we may not be able to obtain adequate amounts of merchandise to meet
demand;
. our online partners might be unable to deliver a sufficient number of
customer visits or impressions; and
. our online partners could compete with us for limited online auction
revenues.
If any of our arrangements with other online companies is terminated, or
if we fail to continue to acquire similar arrangements in the future, our
business could be materially harmed.
Our growth and future success depend on our ability to generate traffic to our
Website
Our ability to sell products through our Internet auctions depends
substantially on our ability to attract user traffic to our Website. We have
traditionally spent significant amounts of money for online advertising to
attract and retain users to our Website. As the effectiveness of online
advertising decreases, we intend to pursue an off-line advertising campaign
through traditional media forms such as print, radio and television. If we are
unable to generate traffic to our Website cost effectively, or if our efforts
to promote our auctions using both online and off-line media are not
successful, our growth and business prospects will be substantially limited.
Our purchased inventory model subjects us to risks of decreased or negative
gross margins
We currently purchase most of our merchandise, and in doing so we assume
the inventory and price risks of these products to be sold at auction. These
risks are especially significant because much of the merchandise we currently
auction is subject to rapid technological change, obsolescence and price
erosion. Since we rely heavily on purchased inventory, our success will depend
on our ability to liquidate our inventory rapidly through our auctions. We also
rely heavily on the ability of our buying staff to purchase inventory at
attractive prices relative to resale value and our 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
for us to determine with certainty whether any item will sell for more than the
price we pay for it. Further, because minimum opening bid prices for the
merchandise listed on our Website generally are lower than our acquisition
costs for the merchandise, we cannot be certain that we will achieve positive
gross margins on any given sale. If we are unable to liquidate our purchased
inventory rapidly, if our buying staff fails to purchase inventory at
attractive prices relative to resale value at auction, or if we fail to predict
with accuracy the resale prices for our purchased merchandise, we may be forced
to sell our inventory at a discount or at a loss.
If we fail to maintain satisfactory relationships with our suppliers, or are
unable to obtain sufficient quantities of merchandise, our business would be
materially harmed
We depend upon our suppliers to provide us with merchandise for sale
through our Internet auctions. The availability of merchandise can be
unpredictable. Since our inception, we have sourced merchandise from over 300
suppliers. Merchandise acquired from 20 of these suppliers represented
approximately 58% of our gross merchandise sales for the second quarter of
1999. We do not have long-term supply contracts with any of our suppliers. We
cannot be certain that our current suppliers will continue to sell merchandise
to us or otherwise provide merchandise for sale in our auctions. We also cannot
be certain that we will be able to establish new supplier relationships that
ensure merchandise will be available for auction on our Website.
A limited number of our suppliers process and ship merchandise directly
to our customers. We have limited control over their shipping procedures, and
shipments by these suppliers could be delayed by factors that are beyond our
control. Most merchandise we sell carries a warranty supplied either by the
manufacturer or the supplier. In addition, although we are not obligated to
accept merchandise returns, we could be compelled to accept returns from
customers without receiving reimbursements from the suppliers or manufacturers
if their
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warranties are not honored. Our business will be significantly harmed if we are
unable to develop and maintain satisfactory relationships with suppliers on
acceptable commercial terms, if we are unable to obtain sufficient quantities
of merchandise, if the quality of service provided by these suppliers falls
below a satisfactory standard or if our level of returns exceeds our
expectations.
We rely on third parties to maintain our critical systems and, if these third
parties fail to adequately perform their services, we could experience
disruptions in our operations
We rely on a number of third parties for Internet and telecommunications
access, delivery services, credit card processing and software services. We
have limited control over these third parties and no long-term relationships
with any of them. For example, we do not own a gateway onto the Internet. From
time to time, we have experienced temporary interruptions in our Website
connection and our telecommunications access. Slow Internet transmissions or
prolonged interruptions in our Website connection or telecommunications access
would materially harm our business.
We use UPS and Federal Express delivery services for substantially all of
our products. Should either or both be unable to deliver our products for a
sustained time period as a result of a strike or other reason, our business
would be harmed. In addition, we could experience delays in shipment due to
computer systems failures or other problems related to our third-party service
providers.
Our internally developed auction software depends on operating system,
database and server software that was developed and produced by and licensed
from third parties. We have from time to time discovered errors and defects in
the software from these third parties and we rely to some extent on these third
parties to correct errors and defects in a timely manner. If we are unable to
develop and maintain satisfactory relationships with these third parties on
acceptable commercial terms, or if the quality of products and services
provided by these third parties falls below a satisfactory standard, we could
experience disruptions in our operations.
Our business may suffer from capacity constraints or system interruptions
A key element of our strategy is to generate a high volume of traffic to
our Website. Our revenues depend substantially on the number of customers who
use our Website to purchase merchandise. Accordingly, the satisfactory
performance, reliability and availability of our Website, transaction-
processing systems, network infrastructure and delivery and shipping systems
are critical to our operating results, as well as to our reputation and ability
to attract and retain customers and maintain adequate customer service levels.
Periodically, we have experienced minor systems interruptions, including
Internet disruptions, which we believe may continue to occur from time to time.
Any systems interruptions, including Internet disruptions, that make our
Website inaccessible or reduce our order fulfillment performance would reduce
the volume of goods we are able to sell, which could harm our business. We are
continually enhancing and expanding our transaction-processing systems, network
infrastructure, delivery and shipping systems and other technologies to
accommodate a substantial increase in the volume of traffic on our Website. We
cannot assure you that we will be successful in these efforts or that we will
be able to accurately project the rate or timing of increases, if any, in the
use of our Website or timely expand and upgrade our systems and infrastructure
to accommodate these increases. We cannot assure you that our network or our
suppliers' networks will be able to timely achieve or maintain a sufficiently
high capacity of data transmission, especially if our Website traffic
increases. If we fail to achieve or maintain our capabilities for high capacity
data transmission, consumer demand for our services could decline.
Our failure to manage growth effectively could adversely affect our business
and financial condition
We have rapidly expanded our operations in a short period of time and
anticipate that we will have to continue this expansion to address potential
market opportunities. Our rapid growth has significantly strained our
management, operational and financial resources. We have expanded from two
employees at our inception to 271 employees and 25 full-time equivalent
contract personnel at August 27, 1999, and our sales increased from
approximately $9,000 in the period from our inception to December 31, 1997 to
over $79.9 million in the first half of 1999. We expect to continue to add
additional key personnel in the future. Increases in the number of employees
and the volume of merchandise sales have placed significant demands on our
management.
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To manage our expected growth, we will have 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. We also will have to maintain our
relationships with the following parties to maintain control over our strategic
direction in a rapidly changing environment:
. merchandise suppliers;
. freight companies;
. warehouse operators;
. other Websites; and
. Internet service providers.
We cannot assure you that our current personnel, systems, procedures and
controls will be adequate to support our future operations. We also cannot
assure you that our management will be able to identify, hire, train, retain,
motivate and manage required personnel or that our management will be able to
manage and exploit existing and potential market opportunities successfully. If
we are unable to manage our growth effectively, our business will be harmed.
We may not be able to sustain or grow our business unless we keep up with rapid
technological changes
The Internet and electronic commerce industries are characterized by:
. rapidly changing technology;
. changes in consumer demands;
. frequent introductions of new services or products that embody new
technologies; and
. evolving industry standards and practices that could render our
Website and proprietary technology obsolete.
Our future performance will depend, in part, on our ability to license or
acquire leading technologies, enhance our existing services and respond to
technological advances and emerging industry standards and practices on a
timely and cost-effective basis. Developing Website and other proprietary
technology involves significant technical and business risks. We also cannot
assure you that we will be able to successfully use new technologies or adapt
our Website and proprietary technology to emerging industry standards. We may
not be able to remain competitive or sustain growth if we do not adapt to
changing market conditions or customer requirements.
Increasing governmental regulation of the Internet could adversely affect our
business
We are currently not regulated 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
Internet commerce. 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,
sales tax, and characteristics and quality of products and services.
Furthermore, the growth and development of Internet commerce may prompt calls
for more stringent consumer protection laws that may impose additional burdens
on companies conducting business over the Internet. New laws or regulations may
decrease the growth of the Internet, which, in turn, could decrease the demand
for our Internet auctions and increase our cost of doing business. 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.
The tax treatment of the Internet and electronic commerce is currently
unsettled. A number of proposals have been made at the federal, state and local
level and by some foreign governments that could impose taxes on the sale of
goods and services and other Internet activities. In October 1998, the Internet
Tax Freedom Act
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was signed into law, placing a three-year moratorium on new state and local
taxes on Internet commerce. However, it is possible that future laws imposing
taxes or other regulations on commerce over the Internet could substantially
impair the growth of electronic commerce and as a result have a negative effect
on our business.
In addition, because our service is available over the Internet in
multiple states and because we sell merchandise to numerous consumers resident
in multiple states, we could be required to qualify to do business as a foreign
corporation in each state in which our services are available. We are qualified
to do business in only three states, and our failure to qualify as a foreign
corporation in a jurisdiction where we are required to do so could subject us
to taxes and penalties for the failure to qualify. Any new legislation or
regulation, or the application of laws or regulations from jurisdictions whose
laws do not currently apply to our business, could have a material adverse
effect on our business.
Our business may be adversely affected if we lose key personnel
Our future performance depends substantially on the continued service of
our senior management and other key personnel. In particular, our success
depends upon the continued efforts of our management personnel, including our
CEO and President, Gregory K. Jones and other members of our senior management
team. We have a long-term employment agreement with only one of our key
personnel, Gregory K. Jones, and have no key person life insurance.
Our business will suffer if we do not attract and retain additional highly
skilled personnel
To meet our expected growth and to operate independently, we believe that
our future success will depend upon our ability to hire, train and retain other
highly-skilled personnel. Competition for quality personnel is intense. We
cannot be sure that we will be successful in hiring, assimilating or retaining
the necessary personnel, and our failure to do so could adversely affect our
business and financial condition.
We may suffer disruption in our business because of changes in our systems,
facilities and fulfillment activities
We believe that our success is dependent in large part upon our ability
to provide prompt and efficient service to our customers. As a result, any
disruption of our day-to-day operations could have a material adverse effect on
our business, and any failure of our management information systems or
distribution capabilities could impair our ability to receive and process
customer orders and ship products on a timely basis.
We plan to install new database management software within the next 12
months and expect to upgrade our software and hardware systems on a continuing
basis. We are considering outsourcing warehouse and fulfillment
responsibilities for some of our products. The transition to, or upgrading of,
our hardware and software systems, the relocation of our servers and the
outsourcing of some of our fulfillment activities could result in delays,
failures or execution difficulties that could impair our ability to receive and
process orders and ship products in a timely manner. We intend to relocate our
headquarters to another location in the Chicago area by the end of 1999 and
recently signed a lease for this space. Any disruption or interruption of our
business or operations caused by such delays or failures or the headquarters
relocation could have a material adverse effect on our business.
To date, we have had various interruptions to our service as a result of
loss of power and telecommunications connections. Our insurance coverage may
not be adequate to compensate us for all losses that may occur as a result of
any future service interruptions. Although we have implemented network security
measures and firewall security, our servers are also vulnerable to computer
viruses, physical or electronic break-ins, attempts by third parties to
overload our systems and similar disruptive problems. Any of these things could
lead to interruptions, delays, loss of data or cessation in service to our
users. If any of these events occur, our business, prospects and financial
condition could be significantly harmed.
Concerns about transaction security on the Internet may hinder our business
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We rely
on encryption and authentication technology that we license from third parties
to provide the required security and authentication to ensure the privacy of
Internet
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transactions. Advances in computer capabilities, new discoveries in the field
of cryptography or other events or developments may result in a compromise or
breach of the algorithms we use to protect customer transaction data. Any
breaches in security could cause a significant decrease in the use of our
Website, which would materially harm our business.
Anyone who can circumvent our security measures could misappropriate
proprietary information or cause interruptions in our operations. We could be
required to expend significant capital and other resources to protect against
the threat of security breaches or to alleviate problems caused by these
breaches. Consumer concerns about the security of electronic commerce and user
privacy may also inhibit the growth of the Internet as a means of conducting
commercial transactions. To the extent that our activities or the activities of
third party contractors involve storing and transmitting proprietary
information, such as credit card numbers, security breaches could expose us to
a risk of loss or litigation and possible liability. Our security measures may
not effectively prevent security breaches, and our failure to prevent security
breaches could significantly disrupt our operations.
Our business could be adversely affected if we are unable to adequately protect
our proprietary technology
Our proprietary technology is one of the keys to our performance and
ability to remain competitive. We rely on a combination of trademark, copyright
and trade secret laws to establish and protect our proprietary rights. We also
use technical measures, confidentiality agreements and non-compete agreements
to protect our proprietary rights. Our uBidSM service mark is registered in the
United States. However, we may not be able to secure significant protection for
our service marks or trademarks. Our competitors or others could adopt product
or service names similar to "uBid" or our other service marks or trademarks.
Any of these actions by others might impede our ability to build brand identity
and could lead to customer confusion. Our inability to protect the name uBid
adequately could adversely affect our business and financial condition.
We rely on copyright laws for protection of our proprietary software and
trade secret laws for protection of the source code for our proprietary
software. We generally enter into agreements with our employees and consultants
and limit access to and distribution of our software, documentation and other
proprietary information. The steps we take to protect our proprietary
information may not prevent misappropriation of our technology, and the
agreements we enter into for that purpose might not be enforceable. A third
party might obtain and use our software or other proprietary information
without authorization or develop similar software independently. It is
difficult for us to police for unauthorized use of our technology, particularly
because the global nature of the Internet makes it difficult to control the
ultimate destination or security of software or other transmitted data. The
laws of other countries may not provide us with adequate or effective
protection of our intellectual property.
Other parties have the right to use, distribute and re-license proprietary
rights relating to our auction process
We share ownership of the patent, copyright and other proprietary rights
for some of our auction processing and auction management applications, and
some general purpose libraries, with two third-party developers. As co-owners
of such software and libraries, the two co-developers and uBid have the right
to grant licenses covering such software and libraries without the consent or
notification of the other co-owners. In addition, the two co-developers have
previously granted a license covering such software and libraries to another
third party. This licensee has the right to use, distribute, re-license and
otherwise modify the licensed source codes without royalties or further payment
to any co-developer or other licensee.
We may infringe on third party intellectual property rights and could become
involved in costly intellectual property litigation
We could be sued by other parties claiming infringement by our software
or other aspects of our business. We are not currently involved in any claim
that would have a material effect on our business.
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However, any future claims, with or without merit, could impair our business
and financial condition because they could:
. result in significant litigation costs;
. divert resources;
. divert the attention of management; or
. require us to enter into royalty and licensing agreements which may
not be available on terms acceptable to us or at all.
In the future, we may also need to file lawsuits to enforce our
intellectual property rights, to protect our trade secrets, or to determine the
validity and scope of the proprietary rights of others. Litigation over these
issues, whether successful or unsuccessful, could result in substantial costs
and diversion of resources, which could adversely affect our business and
financial condition.
We may experience unexpected expenses or delays in service enhancements if we
are unable to license third party technology on commercially reasonable terms
We rely on a variety of technology that we license from third parties.
These third-party technology licenses might not continue to be available to us
on commercially reasonable terms or at all. If we are unable to obtain or
maintain these licenses on favorable terms, or at all, we could experience
delays in completing and developing our proprietary software. These delays
could significantly harm our business and financial condition.
We may encounter barriers to international expansion, which could limit our
future growth and adversely impact our business and financial condition
We intend to continue to expand our operations internationally. We do not
currently have any Website content that has been localized for foreign markets,
and we may not be able to establish a global presence. Our expansion into
international markets will require significant management attention and
financial resources.
Doing business on a global level carries inherent risks which could
adversely impact our business and financial condition, such as:
. differing regulatory requirements;
. export restrictions;
. tariffs and other trade barriers;
. difficulties in staffing and managing foreign operations;
. difficulties in protecting our intellectual property rights;
. longer payment cycles;
. problems in collecting accounts receivable;
. political instability;
. fluctuations in currency exchange rates; and
. potentially adverse tax consequences.
In addition, some types of software that contain encryption technology
are restricted by export laws and we could be subject to liability for any
violations of these export restrictions. We may not be able to successfully
market, sell and distribute our products in foreign markets. One or more of
these factors could have a material adverse effect on our future global
operations, and consequently, on our business and financial condition as a
whole.
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We may engage in acquisitions, which could divert management attention and
consume resources and have an adverse impact on our business and financial
condition
We may choose to expand our market presence by acquiring complementary
businesses. Any future acquisitions would expose us to increased risks,
including:
. risks associated with assimilating new operations, sites and
personnel;
. diversion of resources from our existing businesses, sites and
technologies;
. inability to generate revenues from new sites or content sufficient
to offset associated acquisition costs;
. risks associated with the maintenance of uniform standards, controls,
procedures and policies; and
. impairment of relationships with our employees and customers as a
result of integrating new management personnel.
Acquisitions may also result in additional expenses from amortizing
acquired intangible assets or potential businesses. We may not be able to
overcome these risks or any other problems with acquisitions. Our inability to
overcome these risks could adversely affect our business and financial
condition.
Because our agreements with Creative were not subject to arm's-length
negotiations, we may not have obtained terms as favorable as we could have
obtained from third parties
We entered into several agreements with Creative before the spin-off,
including agreements under which Creative will continue to perform various
services, such as Internet and telecommunications services and joint marketing.
These services are material to our operations. Because we were a majority-
owned, indirect subsidiary of Creative at the time we entered into these
agreements, none of these agreements resulted from arm's-length negotiations.
Therefore, the terms and conditions of these agreements may not be as favorable
to us as we could have obtained from unaffiliated third parties.
Creative has agreed not to engage in the online Internet auction business
in the same format in which we conduct our business until March 2000. After
that time, Creative will be able to compete directly or indirectly with us,
including by way of acquiring other companies or businesses. Competition from
Creative could adversely affect our business and financial condition.
We could be subject to indemnification claims from Creative, which could
adversely affect our business and financial condition
We have agreed to indemnify Creative from all liabilities relating to:
. any tax liability created by our actions after the spin-off that
would cause the spin-off to lose its qualification as a tax-free
distribution or to be taxable to Creative for federal income tax
purposes;
. our failure, or the failure of any other person to pay, perform or
otherwise promptly discharge any of our liabilities or obligations;
. any breach by us of any of the agreements we have entered into with
Creative relating to the spin-off; and
. any misstatements of material fact contained in the prospectus used
in connection with our initial public offering.
If we are required to indemnify Creative based on any of these claims, we may
have to make substantial payments, which could adversely impact our business
and financial condition.
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Substantial sales of our stock could depress our stock price
Sales of substantial amounts of our common stock in the public market, or
the perception that these sales might occur, could materially and adversely
affect the market price of our common stock or our future ability to raise
capital through an offering of our equity securities. Our spin-off from
Creative in June 1999 involved the distribution by Creative to its stockholders
of approximately 7.3 million shares of our common stock. In addition, we issued
options to purchase approximately 528,313 shares of our common stock to holders
of Creative stock options in connection with the spin-off. Except for shares
held by our affiliates, all of the shares of common stock that were distributed
to Creative's stockholders in the spin-off are eligible for resale in the
public market. Two of our principal stockholders, Frank and Sam Khulusi, have
agreed not to offer or sell any shares of our common stock for a period of 180
days after the spin-off without the prior consent of the underwriters.
Provisions of our corporate documents could delay or prevent an acquisition of
our company
Provisions of our certificate of incorporation and bylaws, and provisions
of Delaware law, could make it more difficult for a third party to acquire our
company, even if an acquisition would be beneficial to our stockholders. These
provisions could also limit the price that investors might be willing to pay in
the future for shares of our common stock. See "Description of Capital Stock"
for a description of these provisions.
Our stock price is volatile, which could lead to losses by investors and costly
securities litigation
The trading price of our common stock has been and is likely to be highly
volatile and could fluctuate in response to factors such as:
. actual or anticipated variations in our quarterly operating results;
. announcements of technological innovations;
. adoption of new accounting standards affecting the retail industry;
. introduction of new services by us or our competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the Internet and online commerce industries;
. changes in the market valuations of other Internet or online service
companies;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel;
. sales of our common stock or other securities in the open market; and
. other events or factors, many of which are beyond our control.
The stock market has experienced significant price and volume
fluctuations, and the market prices of technology companies, particularly
Internet-related companies, have been highly volatile. In the past, following
periods of volatility in the market price of a company's securities, securities
class action litigation has often been instituted against these companies.
Litigation instituted against us, whether or not successful, could result in
substantial costs and a diversion of our management's attention and resources,
which would have a material adverse effect on our business and financial
condition.
Potential year 2000 problems may involve significant time and expense and could
disrupt our operations
Failure of our internal computer systems or third party hardware or
software, or of systems maintained by third parties, to operate properly with
regard to the year 2000 and thereafter could cause systems
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interruptions or loss of data or could require us to incur significant
unanticipated expenses to remedy any problems. Presently, we cannot reasonably
estimate the duration and extent of any such interruption, or quantify the
effect it may have on our future revenue. We are developing but have not yet
finalized contingency plans to address the potential failure of our systems and
third party systems to be year 2000 compliant.
If our present efforts to address year 2000 compliance issues are not
successful, or if third party suppliers, licensors and providers of hardware,
software and services on which we rely do not successfully address such issues,
our business, operating results and financial condition would be substantially
harmed. Some of the products we have sold may prove to be year 2000 non-
compliant. While we do not expect to have any material product liability
associated with the sale of these products, as the seller we cannot be certain
that we will not incur some expenses to remediate these products. Please refer
to our discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Issues."
Our principal stockholders, officers and directors can act together to
substantially influence our business and policies and delay or prevent a change
in our control
After this offering, our directors, executive officers and principal
stockholders will beneficially own approximately 24.9% of our outstanding
common stock. As a result, these persons will continue to be able to exercise
substantial control over all matters requiring stockholder approval, including
election of directors and approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying or preventing a
change in our control.
Our management has broad discretion over the use of the proceeds of this
offering
Our management could spend most of the proceeds of this offering in ways
with which our stockholders may not agree. We intend to use the net proceeds of
this offering for general corporate purposes, including capital expenditures
and potential future acquisitions. As of the date of this prospectus, we cannot
specify with certainty the particular uses for the net proceeds we will receive
from this offering.
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. We intend such forward-looking statements to be covered
by the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and we are including this
statement for purposes of complying with these safe harbor provisions. We have
based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are not
guarantees of future performance and are subject to risks, uncertainties and
assumptions, including those set forth under "Risk Factors."
Words such as "expect," "anticipate," "intend," "plan," "believe,"
"estimate" and variations of such words and similar expressions are intended to
identify such forward-looking statements. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
prospectus might not occur.
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USE OF PROCEEDS
The net proceeds from the sale of the shares of common stock being
offered by us in this offering are estimated to be approximately $40.6 million
at an assumed public offering price of $21.94 (approximately $46.8 million if
the underwriters exercise their over-allotment option in full), after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us.
We intend to use the net proceeds of this offering for general corporate
purposes, including working capital, capital expenditures, sales and marketing,
investments in systems and infrastructure and other corporate expenses, and
may, when and if the opportunity arises, use an unspecified portion of the net
proceeds to acquire or invest in complementary businesses, products and
technologies. As of the date of this prospectus, we cannot specify with
certainty the particular uses for the net proceeds we will receive in this
offering. Accordingly, our management will have broad discretion in applying
our net proceeds of this offering. Pending such uses, the net proceeds of this
offering will be invested in investment grade, interest-bearing instruments.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock.
We currently intend to retain earnings, if any, to support the development of
our business and do not anticipate paying cash dividends for the foreseeable
future. Payment of future dividends, if any, will be at the discretion of our
Board of Directors after taking into account various factors, including our
financial condition, operating results and current and anticipated cash needs.
PRICE RANGE OF OUR COMMON STOCK
Since our initial public offering on December 4, 1998, our common stock
has traded on the Nasdaq National Market under the symbol "UBID." The following
table sets forth the high and low closing prices of our common stock, for the
periods indicated, as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
----- ----
<S> <C> <C>
Year ended December 31, 1998
Fourth Quarter (from December 4, 1998)................ $ 188 $ 33
Year ending December 31, 1999
First Quarter......................................... $134 1/16 $53 7/8
Second Quarter........................................ $ 69 1/8 $21 5/8
Third Quarter (through August 27, 1999)............... $ 33 15/16 $16 7/16
</TABLE>
On August 27, 1999, the last reported sale price of our common stock on
the Nasdaq National Market was $21.94. The market price for our stock is highly
volatile and fluctuates in response to a wide variety of factors. See "Risk
Factors--Our stock price is volatile, which could lead to losses by investors
and costly securities litigation." As of August 27, 1999, there were
approximately 103 record holders of our common stock.
20
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999 as
follows:
. on an actual basis; and
. as adjusted to give effect to the sale by us of 2,000,000 shares of
our common stock offered hereby at an assumed public offering price
of $21.94 per share and the receipt of estimated net proceeds from
this offering, after deducting underwriting discounts and our
estimated offering expenses. You should read this table in
conjunction with the consolidated financial statements and notes and
"Selected Consolidated Financial Data" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
June 30, 1999
---------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Note payable to Creative................................. $ 3,331 $ 3,331
Stockholders equity(1):
Preferred stock, $.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding--actual
and as adjusted....................................... -- --
Common stock, $.001 par value; 20,000,000 shares
authorized, 9,146,883 shares issued and outstanding,--
actual; 11,146,883 shares issued and outstanding--as
adjusted.............................................. 2 4
Additional paid-in capital............................. 37,138 77,779
Deferred compensation.................................. (6,206) (6,206)
Accumulated deficit.................................... (18,996) (18,996)
-------- --------
Total stockholders' equity........................... 11,938 52,581
-------- --------
Total capitalization............................... $ 15,269 $ 55,912
======== ========
</TABLE>
- --------
(1) Excludes 2,397,223 shares of common stock issuable upon exercise of options
outstanding as of August 27, 1999 under our 1998 Stock Incentive Plan and
our informal stock option plan and 428,953 additional shares reserved for
issuance pursuant to future grants under our 1998 Stock Incentive Plan. The
outstanding stock options have a weighted average exercise price of $18.78
per share. See "Management--Employee Benefit Plans," "Management--Executive
Compensation" and Notes 5, 6 and 8 of the notes to the financial
statements.
21
<PAGE>
DILUTION
As of June 30, 1999, our net tangible book value was $11.9 million in the
aggregate, or $1.31 per share. Net tangible book value per share represents our
total tangible assets less total liabilities, divided by the number of
outstanding shares of common stock. Dilution per share represents the
difference between the amount per share paid by investors in this offering of
common stock and the net tangible book value per share after the offering.
After giving effect to the sale of 2,000,000 shares of common stock and after
our application of the estimated net proceeds from the offering (at an assumed
public offering price of $21.94), our net tangible book value as of June 30,
1999 would have been $52.6 million in the aggregate, or $4.71 per share. This
represents an immediate increase in net tangible book value of $3.40 per share
to existing shareholders and an immediate dilution in net tangible book value
of $17.23 per share to new investors purchasing shares of common stock in the
offering. If the public offering price is higher or lower, the dilution to the
new investors will increase or decrease accordingly. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share....................... $21.94
Net tangible book value per share before the offering....... $1.31
Increase attributable to new investors...................... 3.40
-----
Pro forma net tangible book value per share after the
offering..................................................... 4.71
------
Dilution per share to new investors........................... $17.23
======
</TABLE>
22
<PAGE>
SELECTED FINANCIAL DATA
(dollars in thousands, except per share data)
The following selected statements of operations data for the period from
April 1, 1997 (inception) through December 31, 1997, and for the year ended
December 31, 1998 and the selected balance sheet data as of December 31, 1997
and 1998 have been prepared using our audited financial statements and the
notes thereto appearing elsewhere in this prospectus and have been audited by
Ernst & Young LLP, independent auditors. The statement of operations data for
each of the six-month periods ended June 30, 1998 and 1999, and the balance
sheet data as of June 30, 1999, are derived from our unaudited financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for such periods. When you read this
financial data, it is important that you also read the historical financial
statements and related notes included in this prospectus, as well as the
section of this prospectus related to Management's Discussion and Analysis of
Financial Condition and Results of Operations. The historical results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
Inception Year Six Months Ended
(April 1, 1997) Ended June 30,
to December 31, December 31, --------------------------
1997 1998 1998 1999
--------------- ------------ ---------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 9 $ 48,232 $ 8,826 $ 79,907
Gross profit............ 1 3,975 680 6,945
Loss from operations.... (287) (9,999) (1,801) (8,928)
Net loss................ (313) (10,169) (1,888) (8,514)
Basic and diluted net
loss per share(1)...... $ (0.04) $ (1.36) $ (0.26) $ (0.93)
Shares used to compute
basic and diluted net
loss per share(1)...... 7,329,883 7,461,061 7,329,883 9,146,883
<CAPTION>
December 31, June 30, 1999
---------------------------- --------------------------
1997 1998 Actual As Adjusted(2)
--------------- ------------ ---------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ -- $ 26,053 $ 20,780 $ 61,423
Working capital......... 31 21,445 13,528 54,171
Total assets............ 358 34,625 33,541 74,184
Note payable to
Creative............... 670 3,331 3,331 3,331
Total stockholders'
equity (deficit)....... (312) 18,633 11,938 52,581
</TABLE>
- --------
(1) See Notes 1 and 5 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 and Note 5 for an explanation of the
non-cash charge recorded in the fourth quarter of 1998 and the first half
of 1999 in connection with certain employee and director stock options
granted prior to our initial public offering.
(2) Adjusted to reflect the sale of 2,000,000 of our shares in this offering at
an assumed public offering price of $21.94 per share and our receipt of the
estimated net proceeds after deducting the estimated underwriting discounts
and commissions and offering expenses.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements which involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including but not limited to those discussed in "Risk Factors" and elsewhere in
this prospectus.
Overview
We operate a leading online auction marketplace offering products to
consumers and businesses. Our auctions currently feature a rotating selection
of brand name computers, consumer electronics, housewares, sporting goods and
memorabilia, and jewelry which typically sell at significant discounts to
prices found at traditional retailers. We currently run auctions seven days a
week, offering on average over 3,000 total items in each of our daily auctions.
From our first auction in December 1997 through June 30, 1999, we auctioned
over 787,000 merchandise units, registered over 533,000 users and recorded more
than 54.0 million visits to our Website. Our net loss of $19.0 million from our
inception to June 30, 1999 was principally due to investments in infrastructure
as we commenced sales operations. We expect to continue to experience losses
for the foreseeable future as we continue to make significant investments in
building our customer base and operating infrastructure.
We obtain merchandise directly from over 300 manufacturers, distributors
and retailers. In May 1999, we launched the uBid Auction Community, which
provides approved suppliers access to the uBid Website to place products for
direct auction to customers. We have recently expanded into the business-to-
business market through agreements with Cahners and Surplus Record, publishers
of business periodicals that cover a wide variety of industries. Through these
arrangements, we plan to offer a variety of industrial equipment products for
auction to business customers.
We recently entered into an agreement with LibertyOne, an Australian
media company, to provide LibertyOne access to our auction technology and brand
name in exchange for a licensing fee, payments for professional services and
future royalties from its auction sales in Australia and New Zealand, with an
option to expand into various Southeast Asian markets.
We either purchase merchandise outright or acquire the right to sell the
merchandise under consignment-type relationships with suppliers on a revenue
sharing basis. In the case where we purchase merchandise outright, we bear both
inventory and price risk. When we acquire merchandise on a revenue sharing
basis, title to the inventory passes to us only after the sale, and we invoice
the customer and bear the credit and return risks. Under both types of
transactions, whether purchased inventory or revenue sharing, we recognize the
full sales amount as revenue after we verify the credit card transaction
authorization and ship the merchandise. In instances where the credit card
authorization has been received but the merchandise has not been shipped, we
defer revenue recognition until the merchandise is shipped. We have begun
offering credit to some of our business customers that have been pre-qualified
as having appropriate credit ratings, and accordingly, we will have to manage
the associated risks of accounts receivable expansion and collection.
In connection with our new agreements with Cahners and Surplus Record,
revenue will be recognized on a commission basis. Upon the sale of items under
such arrangements, only the commissions will be recorded as revenues. In such
cases, we will not bear either inventory or credit risk.
Through June 30, 1999, we have incurred expenses related to establishing
ourselves as an independent company of approximately $200,000 and estimate that
we will need to spend a total of approximately $1.8 million in capital
expenditures to fully establish ourselves as an independent company. These
expenditures
24
<PAGE>
will include warehouse and distribution equipment, hardware and software for
computer systems and furniture and fixtures. We expect to fund our purchase of
capital equipment with working capital, including the proceeds from this
offering. As of the spin-off date, we terminated a services agreement with
Creative, pursuant to which Creative provided us with various administrative
services. Since that time, we have engaged third parties to perform some of
these services and have had other of the services performed internally by our
personnel.
Due to our historical dependence on Creative for funding and certain
services, our ability to grow prior to our initial public offering was
constrained by the allocation of resources made by Creative. Our growth has
also been constrained by our inability to sell and ship products
internationally due to contractual restraints on Creative and because we have
been precluded from selling certain lines of merchandise as a result of
agreements to which Creative is subject. As a result of the spin-off, we are no
longer subject to these restrictions.
We have an extremely limited operating history upon which to base an
evaluation of our business and prospects. Our 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 we have experienced significant growth in revenue since commencing of
operations, there can be no assurance that our revenue will continue at its
current level or rate of growth. Our revenue depends substantially upon the
level of auction activity on our Website. In addition, we have relatively low
gross margins and plan to increase our operating expenses significantly by
increasing the size of our staff, expanding our 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, our business, results of operations and financial condition will be
materially adversely affected.
Beginning in October 1997, we 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 our company. The completion of our initial
public offering on December 4, 1998 caused a new measurement date to occur,
requiring us to compute compensation expense based upon the difference between
the exercise price of the options and the IPO price. We will record a non-cash
compensation expense charge of $13.3 million in connection with stock options
granted prior to the IPO at prices less than the initial public offering price
of our common stock. The compensation charge will be recognized over the five-
year vesting period of such options. Accordingly, we recorded a compensation
expense of $5.3 million in the fourth quarter of 1998 and $1.8 million in the
first half of 1999.
Results of Operations
Six Months Ended June 30, 1998 and 1999
Net Revenues. Net revenues are comprised of gross merchandise sales,
shipping income net of returns and advertising revenues. Net revenues increased
to $79.9 million from $8.8 million in the first half of 1998. The increase in
net revenues was due to significant growth in our customer base, an expanded
selection of merchandise offered and an increase in the number of auctions per
week. We intend to increase advertising to drive additional traffic to our
Website, further allowing us to broaden our 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 are affected by our ability to cost-effectively source merchandise and
attract sufficient traffic to our Website to achieve a favorable balance
between the number of bidders and the amount of merchandise auctioned. Gross
profits increased to $6.9 million from approximately $680,000 in the first half
of 1998. As a percent of net revenues, our gross profit in the first half of
1999 was 8.7%, compared to 7.7% in the first half of 1998. Gross profit
percentage increased due to expansion into new higher margin product
categories.
25
<PAGE>
Operating Expenses. Operating expenses have increased significantly since
our inception. This trend is expected to continue as we continue to expand our
operations to increase our customer base, enhance our brand name and increase
our market share, all of which will require significant increases in marketing
and advertising expenditures, additional personnel, enhancements to our and
further development of our infrastructure. Creative has provided us with
administrative (accounting, human resources, legal) (through June 7, 1999),
warehousing and distribution (through June 1998), Internet/telecom and joint
marketing services. The costs of these services as a percent of total operating
expenses have declined each quarter since our inception. We expect that these
costs will continue to decline as a percent of total operating expenses and in
absolute dollars in the future. Since the time of the spin-off, we have had to
engage third parties to perform certain administrative and transactional
services or have such services performed by our personnel. We do not expect
that the costs associated with the transition to internal and third party
administration and transaction processing will be material.
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 expenses
increased to $6.6 million from approximately $557,000 in the first half of
1998. Sales and marketing expenses as a percent of net revenues were 8.3% for
the first half of 1999, an increase from 6.3% in the first half of 1998. These
expenses have increased due to increasing advertising expenditures and
personnel additions. We expect sales and marketing expenses to increase
significantly in absolute dollars as we increase our customer base. We have
established marketing relationships with a number of online companies including
AOL, MSN/LinkExchange, PCWorld Online, LookSmart and Prodigy to increase our
access to online customers and build brand recognition. Under these
arrangements, we receive portal positioning, anchor tenancy, promotional
placements, sponsorships and/or banner advertisements for a monthly fee.
Generally, these agreements have terms up to three years, do not provide for
guaranteed renewal and may be terminated by us without cause. Our payments to
these online companies for the six months ended June 30, 1999 were
approximately $1.3 million and our payments for the second half of 1999 under
these agreements will be up to approximately $2 million, which does not include
certain additional fees such as payments for producing a certain level of new
registrations.
Technology and Development. Technology and development expenses consist
primarily of payroll and related expenses for systems personnel who develop our
Website and related systems, charges from Creative relating to hosting of our
Website and Internet/telecom operations, and amortization of capitalized
software development costs. Creative has been responsible for hosting our
Website and for Internet/telecom operations. Creative has charged us rates that
management believes are no less favorable than those which could be obtained
from an unaffiliated third party. Technology and development expenses increased
to $1.6 million from approximately $405,000 in the first half of 1998.
Technology and development costs as a percent of net revenues were 2.0% for the
first half of 1999, a decrease from 4.6% in the first half of 1998 when initial
investments in our Website and related systems were relatively high as a
percentage of net revenues.
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. Until the spin-
off date, Creative provided certain general and administrative services for
credit card processing, accounting and benefits administration. General and
administrative expenses increased to $5.9 million from $1.5 million in the
first half of 1998. General and administrative expenses have increased
primarily due to hiring additional personnel and related costs to support
increased sales such as credit card processing and distribution costs. General
and administrative expenses as a percent of net revenues were 7.3% compared to
17.2% in the first half of 1998. We expect general and administrative expenses
to increase in absolute dollars in the future as we expand our operations.
Stock Option Compensation Expense. Prior to our initial public offering,
we had granted 1,038,278 options to purchase our common stock at prices less
than the $15.00 per share initial public offering price. These options were
exercisable only in the event of a successful initial public offering or sale
of our company.
26
<PAGE>
The completion of our initial public offering on December 4, 1998 caused a new
measurement date to occur, requiring us 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 IPO price of $15.00 per share and
the exercise prices of the 1,038,278 options outstanding at December 4, 1998,
the total compensation charge will be $13.3 million, which will be amortized
over the vesting periods of the outstanding options. We recognized $1.8 million
of this charge to compensation in the first half of 1999.
Income Taxes. We had a net loss since our inception in 1997 and expect to
incur losses for the foreseeable 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, we had a net loss of $8.5
million for the first half of 1999 and $1.9 million in the first half of 1998.
The loss in the first half of 1999 was due in part to investments in
infrastructure as we continued to expand our sales operations and a non-cash
charge for amortization of stock compensation expense related to pre-IPO stock
options. We expect to continue to experience losses for the foreseeable future
as we continue to make significant investments in building our customer base
and operating infrastructure.
Period from April 1, 1997 (inception) to December 31, 1997 and Year Ended
December 31, 1998
Net Revenues. We held our first auction the last week of December 1997.
For the year ended December 31, 1998, net revenues were $48.2 million. Growth
in net revenues was due to significant growth in our customer base, an expanded
selection of merchandise offered and an increase in the number of auctions per
week. We intend to increase traffic to our Website, further allowing us to
broaden our customer base, increase the number of auctions per week and expand
the selection and number of items offered.
Gross Profits. Gross profits for the year ended December 31, 1998 were
$4.0 million. As a percent of net revenues, our gross margin was 8.2% for the
year ended December 31, 1998. Gross margin is affected by our ability to cost-
effectively source merchandise and attract sufficient traffic to our Website to
achieve a favorable balance between the number of bidders and the amount of
merchandise auctioned. Merchandise acquired from Creative 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 10% for
1998.
Operating Expenses. Our operating expenses have increased significantly
since our inception. This trend is expected to continue as we continue to
expand our operations to increase our customer base, enhance our brand name and
increase our market share, all of which will require significant increases in
marketing and advertising, additional personnel, enhancements to our Website
and further development of our infrastructure. Creative has provided
administrative (accounting, human resources, legal) (through June 7, 1999),
warehousing and distribution (through June 1998), Internet/telecom and joint
marketing services to us. The cost of these services represented 72% and 21% of
our total operating expenses from our inception to December 31, 1997 and for
the year ended December 31, 1998, respectively. It is expected that these costs
will continue to decline as a percent of total operating expenses and in
absolute dollars in the future. Since the time of the spin-off, we have had to
engage third parties to perform certain administrative and transactional
services previously provided by Creative or have such services performed by our
personnel. We do not expect that the costs associated with the transition to
internal and third party administration and transaction processing will be
material.
Sales and Marketing. Sales and marketing expenses were approximately
$10,000 and $2.8 million from our inception to December 31, 1997 and for the
year ended December 31, 1998, respectively. Sales and marketing expenses as a
percent of net revenues were 5.9% for the year ended December 31, 1998. These
expenses have increased significantly each month of operations due to
increasing advertising expenditures and personnel additions. We expect sales
and marketing expenses to increase significantly in absolute dollars as we
increase our customer base.
27
<PAGE>
Technology and Development. Technology and development expenses were
approximately $66,000 and $1.0 million from our inception to December 31, 1997
and for the year ended December 31, 1998, respectively. Technology and
development costs as a percent of net revenues were 2.1% for the year ended
December 31, 1998. In addition to the expenses in 1997, we capitalized
approximately $267,000 relating to the development of the core software for our
Website. These costs are being 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 our Website and related systems. Creative has been responsible
for hosting our Website and for Internet/telecom operations. Creative has
charged us rates that management believes are no less favorable than those
which could be obtained from an unaffiliated third party.
General and Administrative. General and administrative expenses were
approximately $212,000 and $4.9 million for the period from our inception to
December 31, 1997 and for the year ended December 31, 1998, respectively.
General and administrative expenses as a percent of net revenues were 10.1% for
the year ended December 31, 1998. Creative supplied general and administrative
services for warehousing and distribution, credit card processing, accounting
and benefits administration. General and administrative expenses increased
during 1998 primarily due to hiring additional personnel and related costs to
support increased sales such as credit card processing and distribution costs.
Stock Option Compensation Expense. As discussed above, we will incur a
total compensation charge of $13.3 million in connection with options we
granted prior to our initial public offering. This amount will be amortized
over the vesting periods of the outstanding options. We recognized $5.3 million
of this charge to compensation in December 1998.
Income Taxes. We have had a net loss since our inception in 1997 and
expect to incur losses for the foreseeable 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, we had a net loss of
approximately $313,000 and $10.2 million for the period from our inception to
December 31, 1997 and for the year ended December 31, 1998, respectively. In
the year ended December 31, 1998 the loss from operations before the non-cash
stock option compensation expense was $4.7 million, and the stock option
compensation expense totaled $5.3 million.
Liquidity and Capital Resources
Prior to our December 1998 IPO, we financed our operations with advances
from Creative and cash flow from operations. The net proceeds from our IPO were
$23.8 million.
Net cash used in operating activities was $3.9 million and $1.4 million
for the six months ended June 30, 1999 and 1998, respectively. During the six
months ended June 30, 1999, the net decrease in cash from operating activities
was due to a net loss from operations of $8.5 million after the non-cash
compensation charge of $1.8 million, an increase in inventories of $1.4
million, a reduction of approximately $873,000 in the amount of short-term
advances from Creative, an increase in prepaid expenses of approximately
$816,000 and an increase in accounts receivable of approximately $796,000. This
decrease was partially offset by an increase in accounts payable of $3.4
million and an increase in accrued marketing and other accrued expenses of
$3.1 million.
Cash used in investing activities was $1.4 million and approximately
$37,000 for the six months ended June 30, 1999 and 1998, respectively, due to
purchases of warehousing, systems and office equipment.
We anticipate that we will have negative cash flows for the foreseeable
future. Creative advanced cash to us for our operations until the consummation
of our IPO. Upon consummation of our IPO, those advances were converted into a
note payable to Creative. The outstanding balance on the note bears interest at
the prime
28
<PAGE>
rate and will be repaid in June 2000. For the six months ended June 30, 1999,
interest income of $551,000 earned on the remaining proceeds of the IPO was
partially offset by interest expense of approximately $137,000 on the note
payable to Creative. Net proceeds from our IPO are being used for working
capital needs, including advertising and brand development for growth, as well
as development of our infrastructure. Through June 30, 1999, we incurred
expenses related to establishing ourselves as an independent company of
approximately $200,000 and estimate that we will need to spend a total of
approximately $1.8 million in capital expenditures to fully establish ourselves
as an independent company. These expenditures will include warehouse and
distribution equipment, hardware and software for computer systems and
furniture and fixtures. We expect to fund the purchase of this equipment with
working capital. In August 1999, we completed the transition to locate our
primary Website servers in the Chicago area and plan to develop a fully
redundant back-up site by the end of the second quarter of 2000. Most of our
back office operations are provided through agreements with Creative. Although
we anticipate continuing to use our current back office administrative systems
in Torrance for the near term, we intend to purchase our own hardware and
software systems, by the end of 1999, at an estimated cost of approximately $1
million. In addition, we plan to install new database management software,
purchase new enterprise software and upgrade our existing systems over the next
12 months at a total estimated cost of approximately $3.3 million. We expect to
fund the purchase of this equipment with working capital, including the
proceeds from this offering.
We intend to retain any earnings for the foreseeable future for use in
the operation and expansion of our business. Consequently, we do not anticipate
paying any cash dividends on our common stock to our stockholders for the
foreseeable future. In addition, it is probable that any debt financing
agreements we may enter into will contain restrictions on our ability to
declare dividends.
We believe that the net proceeds from our IPO and this offering will
satisfy our working capital and capital expenditure requirements for at least
the next twelve months. However, there can be no assurance we will not require
additional funds prior to the expiration of such period. Even if such
additional funds are not required, we 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 our
stockholders.
Our ability to raise equity capital within the next two years may be
limited as a result of statutory and contractual restrictions relating to the
spin-off. For a discussion of these restrictions and the risks they present,
see the risk factor captioned "We are subject to restrictions on our ability to
issue equity securities, which may limit our ability to grow our business and
compete effectively" and "Certain Transactions--Tax Indemnification and
Allocation Agreement."
Year 2000 Issues
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."
We may realize exposure and risk if the systems for which we are
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 which we transact business, certain products
purchased from third parties for resale, the supply and distribution chain for
products we sell, and computers, software, telephone systems and other
equipment used internally. To minimize the potential adverse affects of the
year 2000 problem, we have established an internal project team comprised of
all functional disciplines. This project team has identified internal systems
(both information technology and non-information technology systems) that are
not year 2000 compliant, has determined their significance in the effective
operation of our business, and has developed plans to resolve the issues where
necessary. We have been communicating with the suppliers and others with whom
we do business to assess their year 2000 readiness. The responses we have
received to date generally have indicated that steps are currently being
undertaken by the respondents 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 our business and financial condition.
29
<PAGE>
Initial review of the newest version of our principal transaction
processing software through which nearly all of our business is transacted has
determined it to be year 2000 compliant and, upon implementation of this
version, we do not anticipate any material adverse operational issues to arise.
We have substantially completed our year 2000 assessment for critical systems.
We have begun to implement the newest version of our principal transaction
processing software and expect to complete the implementation before the end of
the third quarter of 1999. To date, the costs we have incurred with respect to
this project are approximately $200,000. Based on current estimates, management
expects that our total costs in connection with our year 2000 compliance
project will be approximately $500,000 and will be financed from general
corporate funds; however, future anticipated costs are difficult to estimate
with any certainty and may differ materially from those currently projected
based on the results of the assessment phase of our year 2000 project. The
anticipated costs associated with our 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
our contingency plans. Management estimates that approximately one half of the
expected costs will be attributed to the redeployment of internal resources and
the other half will be comprised of external consulting fees and software and
hardware upgrades. The redeployment of internal data processing resources is
not expected to materially delay any significant projects.
We believe our auction software to be year 2000 compliant; however, full
compliance will be verified by an external consultant no later than the end of
the third quarter of 1999. We currently run various third party applications
that require year 2000 updates. These are available and are expected to be
implemented no later than the end of the third quarter of 1999. Some of the
products we have sold may prove to be year 2000 non-compliant. While we do not
expect to have any material product liability associated with the sale of these
products, as the seller we cannot be certain that we will not incur some
expenses to remediate these products. We have begun developing contingency
plans for each department in the event that any critical systems are not year
2000 compliant. Upon completion of this project, if systems material to our
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 our business, financial condition and
results of operations.
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BUSINESS
Overview
uBid operates a leading online auction marketplace offering products to
both consumers and businesses. We provide a unique experience that offers
buyers the opportunity to set their own prices on popular, brand name products
at significant discounts to prices found through traditional channels. Our
online auctions provide suppliers with an efficient and economical channel for
maximizing revenue on their merchandise while at the same time moving excess or
unique products and providing consumers and businesses with a convenient method
for obtaining this merchandise at substantial savings. Our auctions currently
feature a rotating selection of brand name computers, consumer electronics,
housewares, sporting goods and memorabilia, and jewelry which typically sell at
significant discounts to prices found at traditional retailers. We run auctions
24 hours a day, seven days a week, currently offering on average over 3,000
total items in each of our daily auctions. From our first auction in December
1997 through June 30, 1999, we have auctioned over 787,000 merchandise units,
registered over 533,000 users and recorded more than 54 million visits to our
Website.
We obtain merchandise directly from over 300 manufacturers, distributors
and retailers. In May 1999, we launched the uBid Auction Community, which
provides approved suppliers access to the uBid Website to place products for
direct auction to customers. We have recently expanded into the business-to-
business market through agreements with Cahners Business Information, a
division of Reed Elsevier, Inc., and Surplus Record, Inc., publishers of
business periodicals that cover a wide variety of industries. Through these
arrangements, we plan to offer a variety of industrial equipment for auction to
business customers.
Industry Background
Growth of the Internet and Online Commerce
The Internet has emerged as a medium for commerce enabling millions of
people to share information and conduct online business on a global basis.
International Data Corporation estimates that the number of Web users worldwide
will grow from approximately 142 million in 1998 to approximately 502 million
by the end of 2003.
The acceptance of the Web represents an enormous opportunity for
consumers and businesses to conduct commerce over the Internet. Forrester
Research estimates that online business-to-consumer commerce will reach
approximately $108 billion by 2003 and that online business-to-business
commerce will reach approximately $1.3 trillion by 2003. Consumers and
businesses typically use the Web to exchange products and services that can be
easily described with graphics and text such as computers, consumer
electronics, books, CDs and airline tickets. The Internet provides the
opportunity to develop one-to-one relationships with customers from a central
location without having to build the infrastructure associated with traditional
businesses. It also provides a direct channel for businesses to interactively
market and sell products to other businesses.
The Online Auction Market Opportunity
Online auctions are uniquely suited to the Web because they leverage the
information collection abilities and interactive nature of the Internet.
Forrester Research estimates that in 2002 the online consumer auction market
will reach approximately $12 billion while the online business auction market
will reach approximately $53 billion. Online auctions allow merchants to
minimize their risk of price erosion on unsold products. These products may
include excess and unique items, which can be new or refurbished. Suppliers
traditionally have sold excess goods through various liquidation channels such
as factory outlets, catalogs, resellers and mass merchants. These channels are
highly inefficient for buyers and sellers for the following reasons:
. the channels are fragmented and multi-layered;
. buyers and sellers lack a reliable and interactive mechanism for
setting prices that reflect the product's true market value;
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. sellers may incur a high cost of developing and maintaining the
physical infrastructure that must be reflected in the price of
products and services;
. sellers are unable to gather, interpret and use information
effectively to minimize inventory and maximize margins;
. sellers are unable to cost effectively reach a broad consumer
audience;
. buyers have limited access to a variety and breadth of goods; and
. transactions must be completed during pre-set hours.
Online auctions leverage the Internet infrastructure to solve many of
these inefficiencies by empowering buyers and suppliers. Suppliers can now
maximize revenue on merchandise through an alternative channel, while
preserving their primary distribution channel. Suppliers can test price points
and demand on new or limited supply items. Buyers can set their own price
through dynamic pricing and their specific requirements. In addition, the
auction site can collect valuable marketing and pricing information about the
bidders and sellers. As a result, a significant opportunity exists for a
centralized online marketplace that combines the unique attributes of the
Internet with the economic advantages of an auction format.
The uBid Solution
Our online auctions provide suppliers with an efficient and economical
channel for maximizing revenue on their merchandise while at the same time
moving excess merchandise and providing consumers and businesses with a
convenient method for obtaining these products at substantial savings.
Our online auctions offer:
. Compelling Value Proposition for Customers. Customers traditionally
have made purchase decisions based on static pricing models that
assume the value of a single product is the same for each customer.
We provide a unique buying experience, offering consumers and
businesses the opportunity to set their own prices on popular, brand
name products at significant discounts to prices found through
traditional channels. We believe that the compelling value
proposition of this approach can be extended to virtually all product
categories.
. Broad Product Offering. Customers are attracted to our auctions by
our broad selection of over 3,000 total items available in each daily
auction. We have leveraged our auction experience, traffic
information, merchandising relationships and direct customer
interface capabilities to expand our product offering to include
housewares, sporting goods and memorabilia, and jewelry.
. Highly Efficient Channel for Suppliers. Our online auctions provide
suppliers with an attractive distribution channel for their products.
Suppliers are attracted to uBid because of the large number of
potential buyers. The frequency of our auctions and our ability to
continuously add new items allow suppliers to dispose of inventory
quickly to minimize the risk of price erosion. In addition, our
auctions provide suppliers the opportunity to optimize sales value
while at the same time liquidating excess merchandise directly to a
nationwide audience, without conflicting with their primary
distribution channels.
. Extensive Merchandising Experience. We have developed a comprehensive
auction management process that allows us to capture detailed
information concerning where, when, how and to whom products are
sold, and helps us to predict customer preferences. Our auction
merchandising model allows us to maximize revenues on products put
into auction by using a sophisticated statistical software package.
This software allows us to project the price at which each product
will ultimately be sold to consumers based on current traffic and
demand, and to determine at what price to purchase products from over
300 suppliers, the product mix, and the number of products we should
auction on a given day.
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Business Strategy
Our objective is to become the online auction marketplace of choice for
suppliers and consumers. The key elements of our strategy are:
. Increase Traffic to the uBid Site. We believe that a key component to
our success is increasing traffic to our Website. We will focus on
the following objectives to implement this strategy:
Strengthen the uBid Brand. We intend to pursue an off-line
advertising campaign which may include traditional media forms such
as print, radio and television. This campaign will highlight the
unique buying experience we offer to consumers and businesses with
the opportunity to set their own prices on popular, brand name
products. We also plan to increase points of access by forming
relationships with, and advertising on, leading Websites, such as our
existing arrangements with AOL, MSN, PCWorld Online, LookSmart and
Prodigy. Premier positioning on these sites drives traffic and gives
us credibility to users and suppliers who are unfamiliar with our
business.
Increase Repeat Visits. We believe that our auction format, regular
rotation of merchandise and user-friendly Website encourage bidders
to return on a frequent basis. Repeat orders accounted for
approximately 72% of total customer orders for the three months ended
June 30, 1999. We have instituted a variety of customer loyalty
programs designed to increase customer retention. For example, we
have entered into a marketing agreement with First USA to offer a co-
branded credit card and special programs and promotions designed
specifically for uBid customers. In addition, we believe that our
Website features, which allow customers to track their complete
bidding history and quickly update customer information, increase
user loyalty.
Introduce Co-Branded Auction Sites. We have begun to construct
auction sites in cooperation with other parties and will provide them
with our auction capabilities. These sites will be co-branded under
the uBid name and the name of the third party. We have arrangements
to construct co-branded auction sites with LookSmart, Cahners,
LibertyOne and Surplus Record and will continue to pursue additional
opportunities to operate co-branded auction sites.
Provide Internet Portal Auction Capabilities. We believe
opportunities exist to partner with various Internet portals to
provide auction capabilities for both the business and consumer
markets. We intend to seek arrangements in which we would provide the
auction software and operate the auctions for the portal. In
exchange, the portal could provide traffic to the main uBid site or
other compensation.
. Expand Markets. We believe that significant opportunities exist to
leverage our auction technology, marketing and expertise into new
markets.
Business-to-Business. Business-to-business markets to date have
seen very little penetration by electronic commerce, and the current
distribution in many of these markets is concentrated in various
broker-dealer networks and is extremely inefficient. We believe
opportunities exist in various business-to-business equipment and
commodity product categories and we have recently entered into
agreements with Cahners and Surplus Record to auction a wide variety
of industrial products to business customers.
uBid Auction Community. In May 1999, we launched the uBid Auction
Community to allow suppliers to further benefit from the uBid
infrastructure. The Auction Community allows approved suppliers to
place products directly on the uBid Website for auction. It also
provides suppliers access to the site directly, allowing them to
benefit from our marketing resources, call center operations, credit
card processing and auction software. Upon sale, we process the
credit card transaction and receive a commission from the sale, and
the supplier ships the products directly to the customer. In June
1999, the Auction Community had over 250 approved suppliers, with an
average of over 8,000 units being offered at auction each week. We
believe that the
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Auction Community will increase the number of products offered on our
Website and will expand the number of suppliers offering products for
auction.
International Opportunities. We intend to expand the uBid model
into international markets. Prior to our June 1999 spin-off, we were
contractually restricted from selling our products overseas. Since
then, we have entered into an agreement with LibertyOne, an
Australian media company, to provide LibertyOne access to our auction
technology and brand in exchange for a licensing fee, payments for
professional services and future royalties from its auction sales in
Australia and New Zealand, with an option to expand into various
Southeast Asian markets. We plan to enter other markets, such as
Europe, either directly or through alliances.
. Broaden Category Offerings. We are continuing to expand our lines of
merchandise to add categories that are well suited for the online
auction format. While our initial focus was primarily on computer
products and consumer electronics, we have broadened our product
categories to include housewares, sporting goods and memorabilia, and
jewelry. In addition, we are expanding our computer products category
to include downloadable software through our agreement with Digital
River.
. Increase Revenue Sharing and Commission Based Arrangements with
Suppliers. We believe revenue sharing arrangements increase margin
opportunity for suppliers and ensure gross margin percentage for us.
We have entered into a number of revenue sharing arrangements to
split the sales proceeds with suppliers on an agreed-upon percentage
basis in which title to the merchandise passes to us only after the
sale. In the second quarter of 1999, we generated approximately 13%
of our revenue from revenue sharing agreements and expect to increase
this percentage over time. In addition, we plan on expanding into
product categories and markets in which we will act as an auction
agent and record only a commission on the product sold.
The uBid Auction
We have designed our 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, or through
a link to the home page, which displays a list of product categories and sub-
categories and showcases the auction's featured items. Within a specific sub-
category, we auction 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, 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 our 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 updated to
reflect the bid and the customer's new position in the list of bidders. At the
customers' option, they may elect to receive an e-mail when outbid or use
agent bidding to automatically increase the bid up 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 at their actual bid
prices. Each winning bidder might 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 our
proprietary software, we automatically determine the winning bidders and send
an e-mail message to confirm their purchases the same day. After being
screened by our anti-fraud software, the customer's credit card is charged and
the merchandise is shipped.
Products and Merchandising
We currently offer on average over 3,000 total items in each of our
daily auctions. For the quarter ended June 30, 1999, our product mix based on
revenues consisted of approximately 47% new merchandise
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and 53% refurbished products. This mix can fluctuate from quarter to quarter
depending on the type of products available for purchase at acceptable prices.
Regardless of the source of the merchandise, most merchandise we sell is
covered by manufacturer or refurbisher warranties. For most products, the
customer may purchase an extended warranty provided by a third party,
Independent Dealer Services, in those states where third-party warranties are
permitted by law. We believe that this extended warranty, combined with our
emphasis on customer service, provides us with an advantage over our
competitors, which generally rely solely on the warranties provided by the
supplier.
We currently offer 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.
Housewares: Kitchen appliances, vacuum cleaners, furniture,
photography and sunglasses.
Sporting Goods and Memorabilia: Sports memorabilia, golf and tennis,
health and fitness, outdoor sports, bicycles, water sports and team
sports equipment.
Jewelry and Gifts: Fine jewelry, including rings, earrings, watches,
bracelets and loose stones.
Our recent auctions have included the following brand names:
<TABLE>
<S> <C> <C> <C> <C>
Consumer Sporting Goods
Computers Electronics Housewares & Memorabilia Jewelry & Gifts
--------- ----------- ---------- -------------- ---------------
Apple Aiwa 3M Callaway Calvin Klein
AST AT&T Braun Carbite Casio
Casio Bose Bush Furniture Donruss D.G. Jewellry
Compaq Canon Coleman Oakwood Swiss Army
Dell Denon Eureka Orlimar Timex
Gateway Harman/Kardon Honeywell Peugeot
Hewlett Packard Infinity Norelco Ping
Hitachi JBL Panasonic Taylor Made
IBM JVC Ray-Ban Titleist
Iomega Kodak Rubbermaid Tommy Armour
Micron Minolta Seattle's Finest Topps
Microsoft Nintendo Singer Upper Deck
NEC Olympus
Toshiba Panasonic
Pioneer
Polaroid
RCA
Xerox
</TABLE>
Supplier Relationships
We obtain merchandise from over 300 manufacturers, distributors and
retailers. We believe that we have substantial access to additional sources of
merchandise and are in a position to leverage our existing relationships and
add new suppliers to increase the breadth and number of products we offer.
Since merchandise availability can be unpredictable, a strong base of supplier
relationships is important to our success. As a result, our buying staff
maintains ongoing contact with our suppliers to learn when new merchandise
becomes available.
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On most of our products, we assume the full inventory and price risk. We
believe our ability to sell our inventory quickly through our auctions
justifies the cost of and risk involved in carrying inventory. We have
developed a sophisticated auction management process to project the price at
which each product will ultimately be sold to consumers based on current
traffic and demand, and to determine at which price to purchase products from
suppliers. In the event we are left with excess inventory, we place this
inventory up for auction immediately through our auction site. To date, our
exposure to excess inventory has not been material.
We also have entered into revenue sharing arrangements with several
suppliers to split the sales proceeds on an agreed-upon percentage basis. We
believe these revenue sharing arrangements are attractive to suppliers because
they allow the supplier to potentially realize more revenue than in the case
where we purchase the merchandise for a fixed price. Our avoidance of any
inventory risk, greater margin upside for the suppliers and ensured gross
margin percentage for us make revenue sharing agreements an attractive
arrangement to both us and our suppliers. These agreements represented
approximately 13% of our revenue for the quarter ended June 30, 1999. As we
enter into more of these arrangements, we believe that the percentage of our
revenues represented by revenue sharing arrangements will continue to increase
over the next 12 months.
Sales and Marketing
To achieve our objective of becoming the Internet auction site of choice
for suppliers and consumers, we have developed a marketing strategy to
strengthen our brand name and increase customer traffic to our 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. We have established
relationships with a number of Internet service and content providers to
increase our access to online customers and to build brand recognition. We
intend to complement our existing relationships and establish a leading brand
name by pursuing additional agreements. Representative relationships include:
. AOL. This relationship provides access to AOL's members through
"premier placements" in the Auctions & Outlets, Computer Hardware,
Consumer Electronics, and Sports & Recreation departments of the
newly redesigned AOL Shopping Channel. These "premier placements"
include fixed advertisements displaying the uBid logo and certain
product offerings, which provide direct links to our Website.
Additionally, our promotional "banners," or rectangular graphic
advertisements, are displayed throughout the AOL Shopping Channel.
The AOL Shopping Channel is accessible through AOL, Compuserve,
AOL.com and Netscape properties.
. MSN. uBid is the premier auction sponsor on the MSN/LinkExchange
network. We receive a text link on the homepage of the
MSN/LinkExchange member site as well as banner ads circulating
throughout the entire MSN/LinkExchange network.
. PCWorld Online. uBid is the premier auction sponsor in the PCWorld
Online Website. We receive a non-rotating banner within the "Where To
Shop" block, access to the "TipWorld" e-mail list and banner ads
circulating throughout the entire PCWorld Online Website.
. LookSmart. uBid is the exclusive co-branded auction partner for
LookSmart. We receive keyword banner ads, category banner ads, a
homepage link and banner ads circulating throughout the entire
LookSmart Website.
. Prodigy. We have a relationship with Prodigy to be its sole auction
partner. This relationship provides fixed placement on the Prodigy
homepage, a second fixed link placement on the "Communities" page and
rotating homepage banner ad placements. In addition, we support a "My
Auction" feature which allows Prodigy users to select auctions that
are of personal interest to them to appear on their customized
homepage.
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. Infoseek. We recently entered into an agreement with Infoseek in
which we will be a premier online business-to-consumer auction
provider. Pursuant to this agreement, co-branded Websites will be
developed through the Auction Center on Infoseek's GO Network, which
will allow GO Network users access to uBid's consumer product
offerings, in exchange for commissions paid by uBid for revenues
generated through the Auction Center.
Internet Advertising. We have taken a disciplined and selective approach
in our advertising strategy that primarily considers the costs of customer
acquisition. We attempt to maximize our return from promotional expenditures by
selecting advertising media based on the cost relative to the likely audience
and ability to generate increased traffic for our Website. We place advertising
on various high-profile and high-traffic conduit Websites including AOL,
Excite, ESPN, PCWorld, Hotmail and Broadcast.com, 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 our Website.
Customer Electronic Mail Messaging. We actively market to our own base of
customers through e-mail messaging. All bidders in our auctions are
automatically added to our electronic mailing list, which numbered over 533,000
registrants through June 30, 1999. We send approximately 800,000 e-mail
messages each month announcing new items available at each auction, special
products available, site changes and new features. We have a strict policy of
sending only solicited e-mail, and a customer can remove his or her name from
our mailing list at any time.
Order Fulfillment
We obtain products from our supplier network shortly before the products
are put into auction. Although most products are held in inventory at our
distribution facility, certain suppliers drop-ship products directly to
customers. However, drop-ship suppliers are generally required to use uBid
labeling and packaging standards and transmit shipment information to us to
provide a uniform customer experience.
The product fulfillment process, from receipt of products through
shipment, is largely automated, enabling us to capture real-time data on
inventory receiving, shipping and stock levels. Over 90% of the products
shipped from our warehouse are shipped the next business day after an auction
closes, and our tight shipping controls have historically kept shipping errors
at negligible levels. We believe that the speed and accuracy of our order
fulfillment process reinforces and enhances our customers' total purchase
experience.
Customer Support and Service
We believe that our ability to establish and maintain long-term
relationships with our customers and encourage repeat visits and purchases is
dependent, in part, on the strength of our customer support and service
operations and staff. We have established multiple channels for communicating
with our customers before and after the sale, including phone, e-mail and
online support. We currently employ 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 us is sold on an "as is" basis, most products are covered by manufacturers'
warranties or third party warranties purchased by the customer. Although we may
not be obligated to do so, we 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 we work with our customers to resolve complaints
about merchandise. In addition, we have automated some of our customer service
functions, including providing users of the Website with online access to
information such as product shipping status. We are committed to continue
enhancing our customer support and service operations through a variety of
measures including improved customer reporting systems.
Technology
We have 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 designed to
make both the customer experience and the transaction reporting and tracking
process
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as seamless and simple as possible. Our hardware and software systems are
designed to integrate seamlessly and manage real-time transactions with limited
human intervention. Our current strategy is to license commercially available
technology wherever possible rather than seek internally-developed solutions
and to focus our internal software development efforts on creating and
enhancing the specialized, proprietary software that is unique to our business.
Some of our auction processing and auction management applications are
jointly owned, in perpetuity, by us and the third-party developers of the
software. The agreements provide that the third-party developers of the
software and uBid jointly own all patent, copyright and other proprietary
rights with respect to the initial auction processing and auction management
applications software platform developed for Creative by the third-party
developers, referred to as the "Original Auction Software." We and the co-
developers also jointly own certain general purpose libraries, referred to as
the "Libraries," which are used with the Original Auction Software.
The three agreements material to our ownership rights in externally
developed software are the agreements with each of the two co-developers of the
Original Auction Software (one of whom is David L. Matthews, the Company's
Director of Applications Development) and an Assignment and License Agreement
between Creative and us. Under the first two agreements with the co-developers
of the Original Auction Software, we have (A) joint ownership rights in the
Original Auction Software, related work product and the Libraries developed by
them prior to December 1997 and (B) sole ownership rights to the software and
related work product developed by Mr. Matthews for Creative beginning in
December 1997. Under the Assignment and License Agreement with Creative,
Creative assigned to us all of its right, title and interest in the copyrights
in (Y) the Original Auction Software and Libraries covered by the third-party
developer agreements described above and (Z) the on-line auction software
developed by Creative's employees for us, which consist primarily of interfaces
with existing distribution, credit processing and other administrative systems.
Under the Assignment and License Agreement, we have granted to Creative a
perpetual, non-exclusive, transferable, royalty-free license to those portions
of the assigned software that are not specific to the operation of our current
on-line auction system.
As co-owners of the Original Auction Software and the Libraries, the two
co-developers and uBid have the right to grant licenses covering these software
and libraries without the consent or notification of the other co-owners. In
addition, the two co-developers have previously granted a license covering
these software and libraries to a third party. This third party licensee has
the right to use, distribute, re-license and otherwise modify the licensed
source codes without royalties or further payment to any co-developer or other
licensee.
Substantial modifications and enhancements to our Original Auction
Software and Libraries have been made by our employees and employees of
Creative on a work-for-hire basis and are our property.
Auction Processing and Auction Management Applications. We use a set of
automated software applications for receiving and validating bids, registering
bidders, placing customers on our mailing list, listing currently active and
recent winning and losing bids and reviewing and submitting customer service
requests. Our internally developed proprietary auction management software
continually tracks every bid posted on all auctions and utilizes regression
analysis to assist us in determining the number of products to auction at any
given time. We believe that this system enables us to maximize margins in each
product category.
Order Processing Applications. We use 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 our contract warehouse and suppliers, and
deposit transaction information into our accounting system. All credit card
numbers and financial 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.
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Marketing Applications. We have developed a set of applications for
sending automated e-mail messaging to customers on a frequent basis. This
software extracts e-mail addresses from our 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 our Website is critical to our
business, and we strive to maximize uptime of our Website. We use the services
of Exodus and other Internet service providers to provide connectivity to the
Internet with redundant carriers. Qwest Communications provides frame relay
services for our back office operations. We believe that these
telecommunication and Internet service facilities are essential to our
operations. Most of our back office operations are provided through our
Internet/Telecommunications Agreement with Creative.
To date, we have had various interruptions to our service as a result of
loss of power and telecommunications connections. Our insurance coverage may
not be adequate to compensate us for all losses that may occur as a result of
any future service interruptions. Although we have implemented network security
measures and firewall security, our servers are also vulnerable to computer
viruses, physical or electronic break-ins, attempts by third parties to
overload our systems and similar disruptive problems. Any of these things could
lead to interruptions, delays, loss of data or cessation in service to our
users.
Our 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 we
believe would enable us to survive a potential failure of any single server
with minimal downtime. In addition, capacity can be quickly and easily expanded
by adding additional servers without incurring significant development costs.
In particular, we strive to maintain access to our 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, we anticipate expanding
our system as usage increases to avoid any decrease in system response time. In
August 1999, we completed the transition to locate our primary Website servers
at Exodus Communications in the Chicago area and plan to develop a fully
redundant back-up site by the end of the second quarter of 2000. Most of our
back office operations are provided through agreements with Creative. Although
we anticipate continuing to use our current back office administrative systems
in Torrance for the near term, we intend to purchase our own hardware and
software systems, by the end of 1999, at an estimated cost of approximately
$1.0 million. In addition, we plan to install new database management software,
purchase new enterprise software and upgrade our existing systems over the next
12 months at a total estimated cost of approximately $3.3 million. We expect to
fund the purchase of this equipment with working capital, including the
proceeds from this offering.
The transition to, or upgrading of, our hardware and software systems and
the relocation of our servers could result in delays, failures or execution
difficulties that could impair our ability to receive and process orders and
ship products in a timely manner. Any disruption or interruption of our
business or operations caused by such delays or failures could have a material
adverse effect on our business.
Competition
The electronic commerce market is rapidly evolving and intensely
competitive, and we expect competition to intensify in the future. We compete
with a variety of other companies depending on the type of merchandise and
sales format offered to customers. These competitors include:
. various Internet auction houses such as Amazon.com Auctions, eBay,
ONSALE, Yahoo! Auctions, First Auction, Surplus Auction, Bid.com,
WebAuction and Insight Auction;
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<PAGE>
. 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,
Cendant, BUY.COM and Shopping.com;
. a variety of other companies that offer merchandise similar to ours
through physical auctions, with which we compete for sources of
supply;
. personal computer manufacturers that have their own direct
distribution channels for their excess inventory or refurbished
products; and
. companies with substantial customer bases in the computer and
peripherals catalog business, including CDW Computer Centers, PC
Connection and Creative Computers, some of which already sell online
or may devote more resources to Internet commerce in the future.
We believe that the principal competitive factors affecting our market
are a company's ability to:
. attract customers at favorable customer acquisition costs;
. operate a Website in an uninterrupted manner and with acceptable
speed;
. provide effective customer service; and
. obtain merchandise at satisfactory prices.
We cannot assure you that we can maintain our competitive position
against our current and potential competitors, especially those with greater
financial, marketing, customer support, technical and other resources than we
have.
Some of our current and potential competitors have established or may
establish cooperative relationships among themselves or directly with
suppliers to obtain exclusive or semi-exclusive sources of merchandise. In
addition, there has been consolidation in our industry, which may continue in
the future. Accordingly, it is possible that new competitors or alliances
among competitors and suppliers may emerge and rapidly acquire market share.
In addition, manufacturers may elect to liquidate their products directly.
Increased competition is likely to reduce our operating margins, cause us to
lose market share or diminish our brand. If any of these things occur, our
business would be significantly harmed.
Many of our current and potential competitors have significantly greater
financial, marketing, customer support, technical and other resources than we
do. As a result, these competitors may be able to secure merchandise from
suppliers on more favorable terms than we can. They may be able to respond
more quickly to changes in customer preferences or devote greater resources to
developing and promoting their merchandise.
Intellectual Property and Other Proprietary Rights
Our performance and ability to compete are dependent to a significant
degree on our proprietary technology. We rely 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 our proprietary rights. The uBidSM service mark is
registered in the United States. We cannot assure you that we will be able to
secure significant protection for our service marks or trademarks. It is
possible that our competitors or others will adopt product or service names
similar to uBid or other service marks or trademarks uBid, thereby impeding
our ability to build brand identity and possibly leading to customer
confusion. Our inability to protect the name "uBid" adequately could have a
material adverse effect on our business, results of operations and financial
condition.
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<PAGE>
Our proprietary software is protected by copyright laws. The source code
for our proprietary software also is protected under applicable trade secret
laws. We co-own the patent, copyright and other proprietary rights with respect
to our auction processing and auction management applications and certain
general purpose libraries with the third-party developers of these applications
and libraries.
As part of our confidentiality procedures, we generally enter into
agreements with our employees and consultants and limit access to and
distribution of our software, documentation and other proprietary information.
We cannot assure you that the steps we have taken will prevent misappropriation
of our technology or that agreements entered into for that purpose will be
enforceable. Notwithstanding the precautions we have taken, it may be possible
for a third party to copy or otherwise obtain and use our software or other
proprietary information without authorization or to develop similar software
independently. Policing unauthorized use of our 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 us little or no effective
protection of our intellectual property.
We may in the future receive notices from third parties claiming
infringement by our software or other aspects of our business. While we are not
currently subject to any such claim that would have a material effect on our
business or financial condition, any future claim, with or without merit, could
result in significant litigation costs and diversion of resources including the
attention of our management, and require us to enter into royalty and licensing
agreements, which could have a material adverse effect on our business, results
of operations and financial condition. Royalty and licensing agreements, if
required, may not be available on terms acceptable to us, or at all. In the
future, we may also need to file lawsuits to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Litigation, whether successful or
unsuccessful, could result in substantial costs and diversion of resources,
which could have a material adverse effect on our business, results of
operations and financial condition.
We also rely on a variety of technologies that we license from third
parties, including our database and Internet server software, which is used on
our Website to perform key functions. We cannot be certain that these third-
party technology licenses will continue to be available to us on commercially
reasonable terms. Our inability to maintain or obtain upgrades to any of these
technology licenses could result in delays in completing our proprietary
software enhancements and new developments until equivalent technology could be
identified, licensed or developed and integrated. Any delays would materially
adversely affect our business, results of operations and financial condition.
Employees
As of August 27, 1999 we had 271 employees and 25 full-time equivalent
contract personnel. None of our employees is represented by a labor union, and
we consider our employee relations to be good. Competition for qualified
personnel in our industry is intense, particularly for software development and
other technical staff. We believe that our future success will depend in part
on our continued ability to attract, hire and retain qualified personnel.
Facilities
Our principal administrative, engineering, merchandising and marketing
facilities total approximately 15,000 square feet and are located in Elk Grove
Village, Illinois under leases that are shared with Creative and expire in
2002. To accommodate our growth, we plan to relocate our headquarters to a
facility in the Chicago area by the end of 1999 and recently signed a lease for
this space. Until July 1998, we were dependent on Creative for warehousing and
distribution services. In July 1998, we became responsible for our own
warehousing and distribution and entered into a sublease for 100,000 square
feet of Creative's 325,000 square foot distribution center in Memphis,
Tennessee. The sublease provides for our continued use of Creative's inventory
control and shipping systems during the term of the sublease. The sublease is
at a monthly rate equal to Creative's obligation to the landlord, plus taxes
and utilities, and will expire in 2002. We believe that we
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<PAGE>
have adequate space for our current needs. As we expand, we will have to find
suitable additional space, and we cannot be certain that suitable space will be
available on commercially reasonable terms. We are considering outsourcing some
of our warehouse and fulfillment responsibilities and are currently negotiating
with Creative to sublease an additional 70,000 square feet at our distribution
center in Memphis. We do not own any real estate.
Legal Proceedings
From time to time we may be named in claims arising in the ordinary
course of business. Currently, no legal proceedings or claims are pending
against or involve us that, in the opinion of our management, could reasonably
be expected to have a material adverse effect on our business and financial
condition.
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<PAGE>
MANAGEMENT
Officers, Directors and Key Employees
Our executive officers, key employees and directors, their ages and their
positions as of August 27, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<C> <C> <S>
Gregory K. Jones(1) 38 Chairman of the Board of Directors,
President and Chief Executive Officer
Thomas E. Werner 41 Vice President, Chief Financial Officer,
Treasurer and Secretary
Timothy E. Takesue 31 Vice President--Merchandising
Joel D. Ludvigsen 33 Vice President--International
D. Paul Stolarski 48 Vice President--Engineering
Jason M. MacLean 30 Vice President--Customer Care
Frank F. Khulusi(1) 32 Director
Allen U. Lenzmeier 56 Director
Howard A. Tullman(2) 54 Director
Norman H. Wesley(2) 49 Director
Mark C. Layton 39 Director
</TABLE>
- --------
(1) Member of Executive Committee.
(2) Member of Audit Committee and Compensation Committee.
Gregory K. Jones has been President and Chief Executive Officer of uBid
since November 1997, and Chairman of the Board since July 1998. 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. 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.
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.
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 has been Vice President and Chief Financial Officer of
uBid 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.
Timothy E. 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
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for all 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.
Joel D. Ludvigsen joined uBid as Director of Auction Planning in November
1998 and was promoted to Vice President--International in July 1999. 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.
D. Paul Stolarski joined uBid in January 1999 as Vice President--
Engineering. From August 1997 to October 1998, Mr. Stolarski served as Vice
President of Engineering at F5 Networks, a supplier of Internet load balancing
solutions. From August 1996 to August 1997, he served as Section Manager for
Software Development at US Robotics Wireless Data Systems. Prior to that time,
Mr. Stolarski served as product manager for Motorola's Wireless Data Group. Mr.
Stolarski received his M.S. and B.S. degrees in electrical engineering from the
University of Illinois at Champaign-Urbana.
Jason M. MacLean joined uBid in March 1999 as Manager of Customer
Retention and was appointed as Vice President--Customer Care in August 1999.
From September 1996 to March 1999, Mr. MacLean was a senior consultant at Bain
& Company, where he served technology-related clients in both the private
equity and strategic consulting groups. Mr. MacLean received an M.B.A. in
finance and an M.A. in management and international studies from the Wharton
School of Business in 1996, where he was a fellow at the Joseph H. Lauder
Institute. Mr. MacLean received a B.A. in English and Russian from the
University of Pennsylvania.
Frank F. Khulusi has been a director of uBid since its incorporation in
1997, acted as its President until November 1997, and acted as Chairman of the
Board from our incorporation to July 1998. Mr. Khulusi is a co-founder of
Creative Computers, Inc., and has served as its Chairman of the Board,
President and Chief Executive Officer since 1987. Mr. Khulusi attended the
University of Southern California.
Mark C. Layton became a member of the Board of Directors of uBid in
February 1999. Mr. Layton has served as President, Chief Executive Officer and
Chief Operating Officer of Daisytek International, a global distributor of
office consumables and computer supplies, since April 1997 and as a Director
since 1988. He served as President, Chief Operating Officer and Chief Financial
Officer of Daisytek from 1993 to April 1997, as Executive Vice President from
1990 to 1993 and as Vice President--Operations from 1988 to 1990. Prior to
joining Daisytek, Mr. Layton served as a management consultant with Arthur
Andersen & Co., S.C. for six years through 1988, specializing in wholesale and
retail distribution and technology. Mr. Layton received his B.S. degree in
Business Management Information Technology from Northern Arizona University.
Allen U. Lenzmeier was appointed to the Board of Directors in June 1999.
Mr. Lenzmeier currently serves as Executive Vice President and Chief Financial
Officer of Best Buy, Inc., an electronics retailer. Mr. Lenzmeier joined Best
Buy in 1984 and has also served as Best Buy's Senior Vice President of Finance
and Operations and Treasurer. Mr. Lenzmeier received a B.A. degree from
Minnesota University and is a Certified Public Accountant.
Howard A. Tullman joined the Board of Directors in June 1998. Since June
1997, Mr. Tullman has served as the Chief Executive Officer of Tunes.com
(formerly 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.,
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an information industry venture capital firm which he founded in 1990. Mr.
Tullman is Chairman of the Board of Directors of Cobalt Group, Inc., a provider
of Internet marketing and data aggregation services. Mr. Tullman received his
B.A. degree from Northwestern University and a J.D. from the Northwestern
University School of Law.
Norman H. Wesley became a member of the Board of Directors of uBid in
November 1998. Beginning January 1, 1999, Mr. Wesley became 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 will
serve as Chief Executive Officer of Fortune Brands beginning January 2000. From
May 1997 to December 1998, Mr. Wesley served 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 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 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.
Compensation of Directors
Our directors did not receive cash compensation for serving on the Board
of Directors or its committees for the fiscal year ended December 31, 1998, but
they were reimbursed for expenses incurred in attending Board meetings.
In 1998, Mr. Tullman and Mr. Wesley were each granted an option to
purchase 18,325 shares of our common stock, at an exercise price of $6.82 and
$11.79, respectively, per share, in connection with their becoming directors of
uBid. In connection with his appointment as a director in February 1999, Mr.
Layton was granted an option to purchase 18,325 shares of our common stock at
an exercise price of $62.50 per share. Mr. Lenzmeier received options to
purchase 18,325 shares of our common stock at the time of his board appointment
in June 1999 at an exercise price of $27.88 per share. Stock option grants made
to our directors in 1998 were made under our informal stock option plan. We
intend to make future option grants to our non-employee directors under our
1998 Stock Incentive Plan. Other than option grants and the reimbursement of
reasonable expenses incurred with attending Board and Committee meetings, we
have not yet adopted specific policies on directors' compensation and benefits.
Committees of the Board
Effective as of the closing of our initial public offering in December
1998, we established three standing committees of our Board of Directors: an
Executive Committee, an Audit Committee and a Compensation Committee. We do not
have a nominating committee. The basic functions of each of these standing
committees are summarized below.
Audit Committee. The Audit Committee, currently consisting of Mr. Tullman
and Mr. Wesley, recommends the appointment of the independent public
accountants of uBid, reviews and approves the scope of the annual audit and
reviews the results thereof with our independent accountants. The Audit
Committee also assists the Board in fulfilling its fiduciary responsibilities
relating to accounting and reporting policies, practices and procedures, and
reviews the continuing effectiveness of our business ethics and conflicts of
interest policies.
Compensation Committee. The Compensation Committee, currently consisting
of Messrs. Tullman and Wesley, recommends to the Board of Directors the
salaries, bonuses and stock awards received by our executive officers. The
Compensation Committee is also responsible for administering our Stock
Incentive Plan. The Compensation Committee determines the recipients of awards,
sets the exercise price of shares granted, and determines the terms, provisions
and conditions of rights granted.
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Executive Committee. The Executive Committee, currently consisting of Mr.
Jones and Mr. Khulusi, is given the power to exercise all powers of the Board,
to the extent permitted by law, in the management of the business and affairs
of uBid except for the amendment of our bylaws or the approval or
recommendation of matters to our stockholders.
Compensation Committee Interlocks and Insider Participation
Since its establishment in December 1998, the Compensation Committee has
consisted of Messrs. Tullman and Wesley, neither of whom is or has been an
officer or employee of uBid. Prior to the establishment of the Compensation
Committee, the Board of Directors set the compensation of our officers.
Mr. Jones, who has served as uBid's President and Chief Executive Officer since
November 1997, has participated in the board's deliberations concerning the
compensation of officers other than himself. Mr. Khulusi, who is a member of
the Board of Directors and who participated in board deliberations concerning
compensation of officers prior to the establishment of the Compensation
Committee, serves as President and Chief Executive Officer of Creative
Computers, with which we have engaged in several transactions which are
described under the caption "Certain Transactions" below.
Executive Compensation
The following table sets forth for the period from our inception in 1997
to December 31, 1998 the compensation of Gregory K. Jones, our President and
Chief Executive Officer, and our four other most highly paid officers, whom we
refer to as the Named Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation(2) Awards
----------------------------- ------------
Other Annual Securities All Other
Name and Principal Salary Bonus Compensation Underlying Compensation
Position(1) Year ($) ($) ($) Options (#) ($)(3)
------------------ ---- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Jones........ 1998 $175,000 $50,000 -- -- $1,630
Chairman, President and 1997 19,519 -- -- 366,494 --
Chief Executive
Officer
Thomas E. Werner(4)..... 1998 6,153 -- -- 109,948 --
Vice President, Chief
Financial Officer,
Treasurer and
Secretary
George Lu(5)............ 1998 106,154 -- -- 100,299 --
Vice President--
Information Systems
Timothy E. Takesue...... 1998 79,077 20,000 -- 45,325 886
Vice President--
Merchandising 1997 16,076 20,000 -- 54,974 --
David L. Hirschman(6)... 1998 134,461 -- -- 109,948 858
Sr. Vice President--
Operations 1997 69,560 -- -- -- --
</TABLE>
- --------
(1) Richard M. Finkbeiner, the former Chief Financial Officer of Creative,
served as the Chief Financial Officer of uBid from Inception through
September 21, 1998. Mr. Finkbeiner did not receive any compensation from
uBid in 1997. Mr. Finkbeiner's compensation from Creative in 1997 consisted
of salary of $233,063, a cash bonus of $94,653, relocation expenses and
allowances paid by Creative in an aggregate amount of $15,246 and an option
to purchase 20,000 shares of Creative common stock with an exercise price
of $7.13 per share. His compensation from Creative in 1998 consisted of a
base salary of $239,668. All compensation paid to Mr. Finkbeiner was for
services provided to Creative, and no allocation was made for services
provided to uBid.
(2) Information regarding certain perquisites and other personal benefits has
been omitted because the aggregate value of such items do not meet the
minimum amount required for disclosure under the rules and regulations of
the Commission.
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<PAGE>
(3) Consists of uBid 401(k) Plan matching contributions on behalf of the Named
Executive Officer.
(4) Mr. Werner joined uBid in 1998.
(5) Mr. Lu joined uBid in 1998 and ceased to be an employee of uBid on August
13, 1999.
(6) Mr. Hirschman served as Senior Vice President--Operations until August 27,
1999. Prior to joining uBid, Mr. Hirschman was employed by Creative and
received for his services to Creative in 1997 a salary of $70,369, a cash
bonus of $18,336 and options to purchase 24,600 shares of Creative common
stock with exercise prices ranging from $5.50 to $6.00 per share.
Summary of Option Grants
The following table sets forth the individual grants of stock options
made by uBid during the fiscal year ended December 31, 1998 to each of the
Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------
Potential
Realizable Value at
Number of % Total Assumed Annual
Securities Options Rates of Stock
Underlying Granted to Price Appreciation
Options Employees Exercise for Option Term (3)
Granted in Fiscal Price Expiration -------------------
Name (#) (1) Year (2) ($/sh) Date 5% 10%
- ---- ---------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Jones........ -- --% $ -- -- $ -- $ --
Thomas E. Werner........ 109,948 16.9 8.87 10/19/08 613,322 1,554,279
George Lu............... 47,644 7.3 .27 01/20/08 8,090 20,502
25,655 4.0 .27 03/30/08 4,356 11,040
27,000 4.2 15.00 12/02/08 254,702 645,466
Timothy E. Takesue...... 18,325 2.8 .27 03/30/08 3,112 7,885
27,000 4.2 15.00 12/02/08 254,702 645,466
David L. Hirschman...... 109,948 16.9 .27 01/08/08 18,669 47,312
</TABLE>
- --------
(1) The above options vest at a rate of 20% per year, except that, in the case
of options granted to Mr. Hirschman, the first 20% installment vested upon
our initial public offering. Upon a merger, sale of substantially all of
the assets or similar transaction involving uBid that results in a change
of control, which we refer to herein as a Change of Control, the next 20%
installment of the option will vest, called 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. See "Employment Agreements and Change-in-Control
Arrangements."
(2) Based on an aggregate of 649,160 options granted to our directors and
employees in fiscal year 1998, including the Named Executive Officers.
(3) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years) and assumes a fair market value
equal to the exercise price per share on the date of grant. It is
calculated by assuming that the stock price appreciates at the indicated
annual rate compounded annually for the entire term of the option and that
the option is exercised and sold on the last day of its term for the
appreciated stock price. No gain to the option holder is possible unless
the stock price increases over the option term.
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<PAGE>
Year-End Option Values
The following table sets forth information concerning the value of
unexercised options at December 31, 1998. No options were exercised by the
Named Executive Officers in the 1998 fiscal year.
YEAR-END OPTION VALUES
Fiscal Year 1998
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1998 December 31, 1998($)(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gregory K. Jones............ -- 366,494 -- $38,978,469
Thomas E. Werner............ -- 109,948 -- 10,747,967
George Lu................... -- 100,299 -- 10,269,590
Timothy E. Takesue.......... -- 100,299 -- 10,269,590
David L. Hirschman.......... -- 109,948 -- 11,693,519
</TABLE>
- --------
(1) The value of in-the-money options is based on the closing price of our
common stock as reported on the Nasdaq National Market on December 31,
1998, which was $106.625 per share, less the aggregate exercise price,
times the aggregate number of shares issuable pursuant to such options. The
closing price of our common stock as reported on the Nasdaq National Market
on August 27, 1999 was $21.94.
1998 Stock Incentive Plan
Our 1998 Stock Incentive Plan was adopted by the Board of Directors and
Creative, as sole stockholder, in August 1998. The purpose of our 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 uBid and our subsidiaries and to
promote the success of our business. Our 1998 Stock Incentive Plan provides for
the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code and the granting of "Awards,"
including nonstatutory stock options, stock appreciation rights, dividend
equivalent rights, restricted stock, performance units, performance shares, and
other equity-based rights to our employees, directors and consultants.
Initially, 1,832,470 shares of our common stock are reserved for issuance under
our 1998 Stock Incentive Plan. Commencing January 2, 2000, the number of shares
of our common stock reserved for issuance under our 1998 Stock Incentive Plan
will be increased by a number equal to 3% of the number of shares of our common
stock outstanding as of December 31 of the immediately preceding calendar year.
However, the number of shares of our common stock available for grant of
incentive stock options is 476,442 shares, and this number is not 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 recipients'
termination of service with us, or their disability or death, the Award will
terminate to the extent it is 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.
With respect to Awards granted to directors or officers, our 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, our 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 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 our common stock, or other
consideration) upon settlement of the Award, payment contingencies and
satisfaction of any performance criteria.
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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 our 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% of the voting power of all classes of our
outstanding capital stock, the exercise price of any incentive stock option
must equal at least 110% of the fair market value of our 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 our common stock
upon exercise or purchase of an Award will be determined by the plan
administrator and may include cash, check, shares of our 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 uBid through the sale of all or
substantially all of our assets, a merger or other business combination in
which uBid is not the surviving entity, referred to as a "Corporate
Transaction," outstanding Awards under our 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 the Award agreements may
provide that, immediately prior to a Corporate Transaction, all or a portion of
the unvested options covered by the Award agreement will become fully vested,
and all restricted stock will be released from any forfeiture restrictions.
Unless terminated sooner, our 1998 Stock Incentive Plan will terminate
automatically in 2008. The Board has the authority to amend, suspend or
terminate our 1998 Stock Incentive Plan subject to stockholder approval of
certain amendments and provided no such action may affect Awards previously
granted under our 1998 Stock Incentive Plan.
Our ability to make future option grants under the 1998 Stock Incentive
Plan or otherwise may be limited by restrictions relating to the spin-off. For
additional information on these restrictions, see the risk factor entitled "We
are subject to restrictions on our ability to issue equity securities, which
may limit our ability to grow our business and compete effectively."
401(k) Plan
Prior to the spin-off, our employees participated in Creative's 401(k)
Savings and Retirement Plan. In June 1999, we adopted our own 401(k) Savings
and Retirement Plan that is intended to qualify for preferential tax treatment
under section 401(k) of the Code. Under the plan, participants may contribute
up to 15% of their eligible compensation, up to $10,000, in any year on a pre-
tax basis. Employee contributions vest over a six-year period.
Employment Agreements and Change-in-Control Arrangements
We have entered into an employment agreement with Gregory K. Jones,
President and Chief Executive Officer of uBid. The agreement with Mr. Jones is
terminable by Mr. Jones upon 30 days prior written notice or by uBid 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. In December 1998, the
Board of Directors approved a $50,000 bonus for Mr. Jones for the 1998 fiscal
year. If Mr. Jones' employment agreement is terminated prior to October 22,
2000, he will receive an amount equal to six months of his base compensation as
severance and continue to receive health benefits for six months after such
termination.
Pursuant to his employment agreement, in 1997 Mr. Jones was granted an
option to purchase 366,494 shares of our common stock at an exercise price of
$0.27 per share. Upon a merger, sale of substantially all of the assets or
similar transaction involving uBid that results in a Change of Control,
Mr. Jones' option will become fully vested.
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In addition to Mr. Jones' employment agreement as described above, Thomas
Werner, Vice President and Chief Financial Officer of uBid, and Timothy E.
Takesue, Vice President--Merchandising, have the right to receive three months'
salary if their employment is terminated by uBid without cause. Upon a change
of control of uBid, all outstanding options held by Mr. Werner and Mr. Takesue
will become fully vested.
Pursuant to stock option agreements covering the 740,784 options granted
by uBid under our informal stock option plan to persons other than Mr. Jones,
Mr. Werner and Mr. Takesue, upon a merger, sale of substantially all of the
assets or similar transaction involving uBid that results in a change of
control of uBid, the next 20% installment of the option will vest along with a
prorated amount of any additional number of unvested shares covered by the
option calculated by (A) subtracting the number of full months remaining until
the normal annual vesting date of the accelerated installment from 12, (B)
dividing the difference by 12 and (C) multiplying the resulting fraction times
the number of shares covered by the next 20% installment. In addition, the
administrator of our 1998 Stock Incentive Plan has the authority to provide for
the acceleration of vesting and exercisability and release from certain
restrictions of awards made under that Plan, upon the occurrence of certain
events resulting in a change of control of uBid or certain major corporate
transactions. To date, options granted under the 1998 Stock Incentive Plan have
contained change of control provisions similar to those described above with
respect to options under our informal option plan.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us with
respect to beneficial ownership of our common stock as of August 27, 1999, both
before and after this offering, by:
. each person known by us to beneficially own 5% or more of our
outstanding common stock;
. each of our directors and executive officers;
. each officer named in the summary compensation table; and
. all current executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
SEC. In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
held by that person that are currently exercisable or exercisable within 60
days of August 27, 1999 are deemed outstanding. Percentage of beneficial
ownership is based upon 9,170,884 shares of common stock outstanding prior to
this offering and 11,170,884 shares of common stock outstanding after this
offering. To our knowledge, except as set forth in the footnotes to this table
and subject to applicable community property laws, each person named in the
table has sole voting and investment power with respect to the shares set forth
opposite such person's name. Except as otherwise indicated, the address of each
of the persons in this table is as follows: c/o uBid, Inc. 2525 Busse Road, Elk
Grove Village, Illinois 60007.
<TABLE>
<CAPTION>
Percent Beneficially
Owned
------------------------
Number of Shares Before After
Name of Beneficial Owner Beneficially Owned Offering Offering
- -------------------------------- ------------------ ---------- ----------
<S> <C> <C> <C>
5% Stockholders:
Sam U. Khulusi(1)............... 1,350,966 14.7% 12.1%
Frank F. Khulusi(2)............. 1,300,267 14.1 11.6
Directors and Named Executive
Officers:
Gregory K. Jones(3)............. 146,598 1.6 1.3
Thomas E. Werner................ 21,990 * *
George Lu(4).................... 15,541 * *
Timothy E. Takesue(5)........... 14,660 * *
David L. Hirschman(6)........... 21,990 * *
Joel D. Ludvigsen............... -- * *
D. Paul Stolarski............... -- * *
Jason M. MacLean................ -- * *
Allen U. Lenzmeier.............. -- * *
Mark C. Layton.................. -- * *
Howard A. Tullman(7)............ 6,665 * *
Norman H. Wesley................ 4,000 * *
All current executive officers
and directors as a group
(11 persons)(8)................ 1,494,180 15.9% 13.1%
</TABLE>
- --------
* Less than 1% of the outstanding common stock.
(1) Sam Khulusi's address is 2459 208th Street, Suite 200, Torrance,
California 90501. Includes options to purchase approximately 9,163 shares
of our common stock that are presently vested or will vest within 60 days
of August 27, 1999.
(2) Frank Khulusi's address is 2555 West 190th Street, Torrance, California
90504. Includes options to purchase approximately 52,886 shares of our
common stock that are presently vested or will vest within 60 days of
August 27, 1999 and 6,044 shares held in trust for the benefit of the
children of Basimah Khulusi.
(3) Includes options to purchase approximately 146,598 shares of our common
stock that are presently vested or will vest within 60 days of August 27,
1999.
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(4) Includes options to purchase approximately 14,660 shares of our common
stock that are presently vested or will vest within 60 days of August 27,
1999. Mr. Lu was Vice President--Information Systems and ceased to be an
employee of uBid on August 13, 1999.
(5) Includes options to purchase approximately 14,660 shares of our common
stock that are presently vested or will vest within 60 days of August 27,
1999.
(6) Includes options to purchase approximately 21,990 shares of our common
stock that are presently vested or will vest within 60 days of August 27,
1999. Mr. Hirschman was uBid's Senior Vice President--Operations until
August 27, 1999.
(7) Includes options to purchase approximately 3,665 shares of our common
stock that are presently vested or will vest within 60 days of August 27,
1999.
(8) Includes an aggregate of 239,779 shares of our common stock issuable upon
exercise of stock options which are presently vested or will vest within
60 days of August 27, 1999.
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CERTAIN TRANSACTIONS
In February 1999, we entered into indemnification agreements with each of
our current directors and executive officers that provide the maximum indemnity
available to directors and officers under Section 145 of the Delaware General
Corporation Law and our bylaws, as well as certain additional procedural
protections. These indemnity agreements provide generally that we will advance
expenses incurred by directors and executive officers in any action or
proceeding as to which they may be indemnified, and require us to indemnify
these individuals to the fullest extent permitted by law.
Relationship with Creative Computers
Prior to our initial public offering, we were a wholly-owned, indirect
subsidiary of Creative. As a wholly-owned subsidiary, we received various
services provided by Creative, including administration (accounting, human
resources, legal) (through June 7, 1999), warehousing and distribution (through
June 1998), Internet/telecom and joint marketing. Creative has also provided us
with the services of a number of its executives and employees. In consideration
for these services, Creative historically allocated a portion of its overhead
costs related to such services to us. We believe that the amounts allocated to
us were no less favorable to us than the expenses we would have incurred to
obtain such services on our own or from unaffiliated third parties. None of
these services were provided to us pursuant to any written agreement between
uBid and Creative.
Frank Khulusi, one of our directors and the owner of approximately 14% of
our common stock, is the president and chief executive officer of Creative. His
brother, Sam Khulusi, who owns approximately 15% of our common stock, is a
director of Creative.
Separation from Creative
In June 1999, Creative distributed to its stockholders all of the
7,329,883 shares of our common stock owned by Creative, which constituted
approximately 80.1% of our outstanding common stock. Prior to the spin-off, we
entered into several agreements with Creative providing for the separation of
the two companies and the distribution of Creative's uBid common stock to its
stockholders, the provision by Creative of certain interim services to us,
employee benefit arrangements and tax and other matters. These agreements,
referred to as the "Ancillary Agreements," are discussed below.
Separation and Distribution Agreement
The Separation and Distribution Agreement we entered into with Creative
sets forth certain agreements among uBid and Creative, with respect to the
principal corporate transactions required to effect the spin-off and certain
other agreements governing the relationship among the parties thereafter.
The Distribution. Under the Separation and Distribution Agreement, uBid
and Creative agreed that neither would take, or permit any of its respective
affiliates to take, any action which reasonably could be expected to prevent
the distribution from qualifying as a tax-free distribution to Creative and its
stockholders pursuant to Section 355 of the Internal Revenue Code. Accordingly,
we agreed not to issue or grant, directly or indirectly, any shares of our
capital stock or any rights, warrants, options or other securities to purchase
or acquire any shares of our capital stock that would affect the tax-free
nature of the distribution.
Registration Rights. The Separation and Distribution Agreement provides
that Frank and Sam Khulusi will have the right in certain circumstances, but in
no event prior to 180 days after the distribution, to require us to register
for resale shares of our common stock held by them under the Securities Act,
subject to certain conditions, limitations and exceptions. We also have agreed
with Frank and Sam Khulusi that if we file a registration statement for the
sale of securities under the Securities Act, then they may, subject to certain
conditions, limitations and exceptions, include in that registration statement
shares of our common stock held by them. In addition, for an additional 90 days
after this 180-day period, we will be entitled to include our shares in any
requested demand registration and to reduce the number of shares to be sold by
Frank
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and Sam Khulusi thereunder to a minimum of 20%, collectively, of the total
offering plus the amount of any underwriters' over-allotment option. We also
agreed to 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.
Releases and Indemnification. We have agreed to indemnify, defend and
hold harmless Creative and each of Creative's directors, officers and employees
from and against all liabilities relating to, arising out of or resulting from:
(1) the failure of uBid or any other person to pay, perform or otherwise
promptly discharge any liabilities of uBid in accordance with their respective
terms; (2) any breach by us of the Separation and Distribution Agreement or any
of the other agreements described below; and (3) material misstatements or
omissions with respect to all information contained in the prospectus or the
registration statement used in connection with our initial public offering.
Except as provided in the Separation and Distribution Agreement, Creative
has agreed to indemnify, defend and hold harmless uBid and each of our
directors, officers and employees from and against all liabilities relating to,
arising out of or resulting from the failure of Creative or any other person to
pay, perform or otherwise promptly discharge any liabilities of Creative other
than the liabilities of uBid, and any breach by Creative of the Separation and
Distribution Agreement or any of the agreements described below. Neither uBid
nor Creative is obligated under the Separation and Distribution Agreement to
indemnify the other for: (1) any liability, contingent or otherwise, assumed,
transferred, assigned or allocated to the other under the Separation and
Distribution Agreement or any of the agreements discussed below; (2) 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 December 9, 1998; (3) 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; (4) any liability that uBid or Creative 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 (5)
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 also contains
provisions that govern, except as otherwise provided in any of the agreements
discussed below, 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
date of the spin-off, Creative 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 us on the
date of the Separation and Distribution Agreement, referred to herein as
Company Business. Except as otherwise contemplated under the Ancillary
Agreements, we anticipate that all future contracts between uBid and Creative
will be at arm's length.
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Expenses. Except as expressly set forth in the Separation and
Distribution Agreement or in any Ancillary Agreement, each party agreed to bear
its own respective third-party fees, costs and expenses paid or incurred in
connection with the spin-off.
Creative Stock Option Adjustments. Options to purchase common stock of
Creative that were outstanding as of the date of the spin-off were adjusted to
become options to purchase shares of both Creative common stock and our common
stock. In connection with the spin-off, we issued options to purchase 528,313
shares of our common stock to holders of these Creative options. The number of
shares of our common stock that was covered by these options was based upon the
ratio of the number of shares of our common stock distributed to Creative's
stockholders in the spin-off, divided by the total number of shares of Creative
common stock outstanding on the record date for the spin-off. In addition, the
exercise price for each adjusted option was allocated between the option to
purchase Creative common stock and the option to purchase our common stock
based on the respective pre- and post-distribution prices of Creative common
stock and our common stock on the Nasdaq National Market to preserve the
intrinsic value and ratio of exercise to market price of the options both
before and after the spin-off. We issued these adjustment options under our
1998 Stock Incentive Plan.
Services Agreement
In December 1998, we entered into a Services Agreement with Creative,
under which Creative provided to us various administrative services, including
general accounting services, credit services and payroll and benefits
administration.
At the time of the spin-off, we mutually terminated the Services
Agreement and Creative no longer performs the transactional and administrative
services covered by the agreement. Since that time, we have engaged third
parties to perform some of these services and have had other of the services
performed internally by our personnel. We believe that we will be able to make
the transition to internal and third party administration and transaction
processing without significant additional expense or disruption of our
business; however, because we historically relied heavily on Creative for these
services, we could experience interruptions or temporary delays in our
operations and our ability to process customer transactions and ship products
on a timely basis.
Tax Indemnification and Allocation Agreement
Prior to the spin-off, we entered into a Tax Indemnification and
Allocation Agreement with Creative, which provides that if any one of certain
events occurs, and such event causes the distribution not to be a tax-free
transaction to Creative under Section 355 of the Internal Revenue Code, we will
indemnify Creative for income taxes Creative may incur by reason of the
distribution not so qualifying. These events include any breach of
representations relating to our activities and ownership of our capital stock
made to Creative or in connection with obtaining an IRS revenue ruling or tax
opinion relating to the spin-off. In connection with the distribution, we made
various representations regarding our intentions at the time of the
distribution with respect to our business. The Tax Indemnification and
Allocation Agreement also provides that Creative will indemnify us for taxes
for which we have no liability to Creative under the circumstances described
above. Regardless of the indemnification provisions of such agreement, Creative
and we 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.
At the time of the spin-off, Creative received an opinion from
PricewaterhouseCoopers LLP to the effect that for federal income tax purposes
the spin-off will qualify as a tax-free spin-off under Section 355 and that no
gain or loss will be recognized by Creative or by holders of Creative common
stock upon the spin-off.
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If the spin-off did not qualify as tax-free as a result of Section
355(e), then Creative would recognize capital gain equal to the excess of (x)
the fair market value of the shares of our common stock Creative distributed to
its stockholders over (y) its adjusted tax basis in our common stock.
In addition to the foregoing indemnities, the Tax Indemnification and
Allocation Agreement provides for: (1) the allocation and payment of taxes for
periods during which uBid and Creative are included in the same consolidated
group for federal income tax purposes or the same consolidated, combined or
unitary returns for state tax purposes; (2) the allocation of responsibility
for the filing of tax returns; (3) the conduct of tax audits and the handling
of tax controversies; and (4) various related matters.
For periods during which we are included in Creative's consolidated
federal income tax returns or state consolidated, combined, or unitary tax
returns (which will include the periods on or before the date of the spin-off),
we will be required to pay an amount of income tax equal to the amount we would
have paid had we filed our 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. We will be responsible for our own separate tax
liabilities that are not determined on a consolidated or combined basis. We
will also be responsible in the future for any increases to the consolidated
tax liability of uBid and Creative that is attributable to us, and will be
entitled to refunds for reductions of tax liabilities attributable to us for
prior periods.
As noted above, we have agreed to indemnify Creative for any tax
liability suffered by Creative arising out of actions by us after the
distribution that would cause the distribution to lose its qualification as a
tax-free distribution or to be taxable to Creative for federal income tax
purposes under Section 355 of the Internal Revenue Code. For example, Section
355(e) 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 us
will not cause the distribution to be taxable to Creative, we agreed to certain
restrictions on our ability to issue and repurchase our equity securities until
three years following the distribution date. Until the second anniversary of
the distribution date, we cannot issue our common stock or other equity
securities, including the shares sold in our initial public offering and in
this offering, that would cause the number of shares of our common stock
distributed by Creative in the distribution to constitute less than 60% of the
outstanding shares of our common stock unless we first obtain either the
consent of Creative 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, we cannot issue our common stock
and other equity securities that, when combined with equity securities sold in
and after our initial public offering and this offering, would cause the number
of shares of our common stock distributed by Creative in the distribution to
constitute less than 55% of the outstanding shares of our common stock unless
we first obtain the consent of Creative or a favorable IRS letter ruling 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 severely limit our ability to raise necessary capital or to complete
acquisitions of other companies using our equity securities. The same
requirements for an IRS letter ruling or consent of Creative are generally
applicable to any proposed repurchases of our common stock during these
restricted periods. The foregoing restrictions do not apply our issuance of
debt securities that are not convertible into our common stock or other equity
securities.
While the issuance of shares in the initial public offering and this
offering should not affect the tax-free nature of the spin-off, the absence of
final IRS regulations under Section 355(e) has created some uncertainty as to
the application of these rules to the distribution by Creative of our common
stock. As a result, we requested and have received Creative's consent to this
offering, as well as an opinion from our outside tax advisors,
PricewaterhouseCoopers LLP, that this offering should not result in the
application of Section 355(e) with respect to the spin-off. Both this opinion
and the opinion Creative received at the time of the spin-off were subject to
certain factual representations and assumptions. We are not aware of any
present facts or circumstances that would cause such representations and
assumptions to be untrue. If the spin-off were taxable due to our actions, we
would face a very large indemnity obligation to Creative, which would have a
significant material adverse effect on our business and financial condition and
may even exceed all of our available capital resources. The existence of this
contingent
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indemnity obligation, particularly because it may be affected to some degree by
any material corporate transaction involving us, may make us a less attractive
acquisition or merger candidate until the uncertainties of Section 355(e) are
resolved or the restrictions described above expire. A copy of the opinion
described above is filed as an exhibit to the registration statement of which
this prospectus is a part. See the risk factor entitled "We are subject to
restrictions on our ability to issue equity securities, which may limit our
ability to grow our business and compete effectively."
Joint Marketing Agreement
uBid and Creative have entered into a joint marketing agreement pursuant
to which we have agreed to continue certain joint marketing efforts that were
in place prior to our initial public offering. The Marketing Agreement provides
that we will continue to be presented on the home page of Creative's "PC Mall"
Website on at least one quarter of the page as well as receive a banner
advertisement on the home page of Creative's "PC Mall" Website. The Marketing
Agreement provides that we will provide to Creative a button that "clicks
through" from the home page of our Website to Creative's "PC Mall" Website. As
consideration for these marketing services, we will either make a payment of
$10,000 per month to Creative or Creative, in its sole discretion, may elect to
receive a banner advertisement on each page of our Website instead of the
monthly payment. The Marketing Agreement has a term expiring in December 1999
and is terminable by either party upon 60 days prior written notice.
Internet/Telecommunications Agreement
uBid and Creative have also entered into an Internet/telecommunications
agreement pursuant to which Creative will continue to provide us with certain
Internet and telecommunications services, including hosting our Website. We
agreed to reimburse Creative 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 has a term expiring in
December 1999 and is cancelable, at the option of either party, upon 90 days
prior written notice, provided that, upon such cancellation, we will be
required to purchase all capital equipment covered by the agreement from
Creative at its depreciated book value.
Sublease Agreement
In July 1998, uBid and Creative entered into a sublease currently
covering 100,000 square feet of Creative's 325,000 square foot distribution
center in Memphis, Tennessee. The sublease provides for our continued use of
Creative's inventory control and shipping systems during the term of the
sublease. The sublease is at a monthly rate equal to Creative's obligations to
the landlord, plus taxes and utilities, and will expire in 2002. We are
currently negotiating with Creative to sublease an additional 70,000 square
feet at the Memphis distribution center.
Other Relationships with Creative
Creative Credit Agreement. Creative 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 Creative's subsidiaries is required to guarantee
Creative's obligations and to grant the lender a security interest in its
assets to secure the obligations under the guaranty. Prior to the spin-off, the
lender released our guaranty obligations under the Credit Agreement.
Payable to Creative. From our inception in April 1997 until our initial
public offering, Creative provided funds to finance our operations in the form
of advances that bear interest at the prime rate. We had amounts due to
Creative for working capital and fixed asset purchases totaling approximately
$4.6 million as of December 31, 1998, of which $3.3 million is represented by a
note due in June 2000 with interest payable monthly, and the remaining $1.3
million of which was repaid during the first quarter of 1999. In addition, as
of June 30, 1999, we owed Creative approximately $404,000 for product purchases
in the ordinary course of business and services provided under the agreements
described above.
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DESCRIPTION OF CAPITAL STOCK
Authorized Capital Stock
Our certificate of incorporation authorizes 25,000,000 shares of capital
stock consisting of (a) 5,000,000 shares of preferred stock and (b) 20,000,000
shares of common stock. Of these shares of common stock, we are offering
2,000,000 shares by this prospectus. Based on the number of shares of our
common stock outstanding on August 27, 1999, we will have 11,170,884 shares of
our common stock outstanding immediately following the closing of this offering
(11,470,884 shares if the Underwriters exercise their over-allotment option in
full), and no shares of our preferred stock will be outstanding. All of the
shares of common stock that will be outstanding immediately following the
closing of this offering, including the shares of common stock sold in this
offering, will be validly issued, fully paid and nonassessable. The following
summary description of our capital stock is qualified by reference to our
certificate of incorporation and bylaws, copies of which are included as
exhibits to the registration statement of which this prospectus is a part.
Common Stock
Voting. Our 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 our
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
our 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 our certificate of incorporation generally
must be approved by a majority of the votes entitled to be cast by all
outstanding shares of our common stock. Our 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 our 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 uBid, the holders of shares of our common stock
will be entitled to receive pro rata all assets of uBid available for
distribution to such holders.
Other Rights. In the event of any merger or consolidation of uBid with or
into another company in connection with which shares of our common stock are
converted into or exchangeable for shares of stock, other securities or
property (including cash), all holders of our 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
Our 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.
58
<PAGE>
We believe that the ability of the Board to issue one or more series of
preferred stock will provide us 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
our common stock, will be available for issuance without further action by the
our stockholders, unless such action is required by applicable law or the
rules of any stock exchange or automated quotation system on which our
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 uBid 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 our 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--
Provisions of our corporate documents could delay or prevent an acquisition of
our company."
Certain Anti-Takeover Effects
Certain provisions of our 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.
Our 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 uBid.
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. Our
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 uBid.
Our 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 our Secretary. To be timely, a stockholders notice must be
delivered to or mailed and received at our principal executive offices, not
less than 45 days nor more than 75 days prior to the date on which we first
mailed our proxy materials for the previous years annual meeting of
shareholders (or the date on which we mail our proxy materials for the current
year if during the prior year we did not hold an annual meeting or if the date
of the annual meeting is changed more than 30 days before or after the prior
year's annual meeting date). Our 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.
Our certificate of incorporation does not allow our stockholders to take
action by written consent.
Section 203 of the DGCL, referred to herein as 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: (1) prior to such 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;
59
<PAGE>
(2) 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 (3) on or subsequent to
that 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 (A) 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 (B) 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. We have not elected to
be exempt from the restrictions imposed under Section 203. However, Creative
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 us 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 our management. It is possible that such provisions could make it
more difficult to accomplish transactions which our stockholders may otherwise
deem to be in their best interests.
Liability of Directors; Indemnification
Our 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 uBid or
its stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability as a result of: (1) any breach of the duty of
loyalty to uBid or its stockholders; (2) actions or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law; (3)
payment of an improper dividend or improper repurchase of uBid's stock under
Section 174 of the DGCL; or (4) 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 uBid 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. Our
certificate of incorporation does not eliminate a director's duty of care. The
inclusion of this provision in our 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 uBid 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.
Our certificate of incorporation and bylaws also provide that we will indemnify
our directors and officers, and may indemnify any of our employees and agents,
to the fullest extent permitted by Delaware law. We are generally required to
indemnify our 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 us or another entity that the director or officer
serves at our request, subject to certain conditions and to advance funds to
our 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 uBid where such
indemnification will be required or permitted.
60
<PAGE>
Registration Rights
Frank and Sam Khulusi have the right, in certain circumstances to require
registration of shares of our common stock under the Securities Act. Under the
terms of each of the registration rights agreements between uBid and these
holders of such registrable securities, if we propose to register any of our
securities under the Securities Act, the registration rights agreements provide
that the holder, or holders, as applicable, are entitled to notice of that
registration and are entitled to include shares of our common stock in the
registration. Subject to certain limitations in the agreements, Frank and Sam
Khulusi may require, on two occasions, that we use our best efforts to register
such shares for public resale, subject to certain limitations. 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. We
will bear the cost of all piggyback registrations. In addition, we will bear
the cost of up to $100,000 of the first and up to $50,000 of the second demand
registrations. 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
this 180-day period, we will be entitled to include our shares in any requested
demand registration and to reduce the number of shares to be sold by 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 us 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 we would bear the
cost of such registration as noted above.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is LaSalle National
Bank. Its address is 135 South LaSalle Street, Chicago, Illinois 60603 and its
telephone number is (312) 904-2000.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 11,170,884 shares of our
common stock outstanding based on shares outstanding as of August 27, 1999. Of
these shares, the 2,000,000 shares sold in this offering will be freely
transferable without restriction under the Securities Act, unless they are held
by "affiliates" of uBid as that term is used under the Securities Act and
related regulations.
Of the remaining 9,170,884 outstanding shares, 7,329,883 shares were sold
by us in reliance on exemptions from the registration requirements of the
Securities Act. Except for shares held by affiliates, these shares are freely
transferable without restrictions under the Securities Act as a result of the
spin-off. Of the remaining shares, 1,817,000 were sold in our initial public
offering and are freely tradable without restriction unless they are held by
affiliates. On December 8, 1999 approximately 2,589,204 shares held by Frank
and Sam Khulusi will become eligible for sale, subject to the provisions of
Rule 144 in the case either of them is deemed an affiliate, upon the expiration
of agreements not to sell such shares entered into between the underwriters and
those stockholders. Any shares subject to lock-up agreements may be released at
any time without notice by the underwriters.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned restricted shares for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
. 1% of the then outstanding shares of our common stock (approximately
111,709 shares immediately after this offering); or
. the average weekly trading volume in our common stock during the four
calendar weeks preceding such sale, subject to the filing of a Form
144 with respect to such sale and certain other limitations and
restrictions.
Sales under Rule 144 are also subject to provisions regarding the manner
of sale of shares, notice requirements and current public information
requirements. In addition, a person who is not deemed to have been an affiliate
of uBid at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years, would
be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above.
Any employee, officer or director of or consultant to uBid who purchased
his or her shares prior to our initial public offering or who holds vested
options as of that date pursuant to a written compensatory plan or contract is
entitled to rely on the resale provisions of Rule 701, which permits non-
affiliates to sell their Rule 701 shares without having to comply with the
public-information, holding-period, volume-limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with the Rule 144 holding-period restrictions. However, we and certain
officers, directors and our other stockholders have agreed not to sell or
otherwise dispose of any shares of our common stock for the 90-day period after
the date of this prospectus without the prior written consent of the
underwriters. See "Underwriting."
We have filed a registration statement on Form S-8 under the Securities
Act covering shares of common stock reserved for issuance under our 1998 Stock
Incentive Plan. Such registration statement has become effective and the shares
registered under such registration statement will generally be available for
sale in the open market, subject to vesting requirements, applicable lock-up
agreements and Rule 144 limitations applicable to affiliates.
Holders of a substantial number of shares of our common stock are
entitled to require us to register their shares under the Securities Act and to
include shares of our common stock they hold in future registrations of our
securities. This would result in such shares becoming freely tradeable without
restriction under the Securities Act immediately upon the effectiveness of such
registration. See "Description of Capital Stock--Registration Rights."
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<PAGE>
UNDERWRITING
General
Subject to the terms and conditions set forth in a purchase agreement
between us and each of the underwriters named below, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, William
Blair & Company, L.L.C. and Wit Capital Corporation are acting as
representatives, we have agreed to sell to the underwriters, and each of the
underwriters severally and not jointly has agreed to purchase from us, the
number of shares set forth opposite its name below.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
Banc of America Securities LLC...................................
William Blair & Company, L.L.C...................................
Wit Capital Corporation..........................................
---------
Total.......................................................
=========
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject
to the terms and conditions set forth in that agreement, to purchase all of the
shares of our common stock being sold under the terms of the agreement if any
of the shares of common stock are purchased. In the event of a default by an
underwriter, the purchase agreement provides that, in certain circumstances,
the purchase commitments of non-defaulting underwriters may be increased or the
purchase agreement may be terminated.
We have agreed to indemnify the underwriters against liabilities under
the Securities Act, or to contribute to payments the underwriters may be
required to make in respect of those liabilities.
The representatives have advised us that the underwriters propose
initially to offer the shares of our common stock to the public at the public
offering price set forth on the cover page of this prospectus, and to dealers
at such price less a concession not in excess of $ per share of common
stock. The underwriters may allow, and such dealers may allow, a discount not
in excess of $ per share of common stock to other dealers. After the public
offering, the public offering price, concession and discount may be changed.
Over-Allotment Option
We have granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of an
additional 300,000 shares of our common stock at the public offering price set
forth on the cover 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 our 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 our common
stock proportionate to such underwriter's initial amount reflected in the
foregoing table.
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<PAGE>
Commissions and Discounts
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no
exercise or full exercise by the underwriters of their over-allotment options.
<TABLE>
<CAPTION>
Without With
Per Share Option Option
--------- ------- ------
<S> <C> <C> <C>
Public offering price............................. $ $ $
Underwriting discount............................. $ $ $
Proceeds, before expenses, to uBid................ $ $ $
</TABLE>
The expenses of this offering, exclusive of the underwriting discount,
are estimated at $600,000 and are payable by us.
The shares of common stock are being 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.
No Sales of Common Stock or Similar Securities
We and our executive officers and directors have agreed (subject to
certain exceptions) not to, directly or indirectly, without the prior written
consent of Merrill Lynch on behalf of the underwriters for a period of 90 days
after the date of the prospectus, 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, lend or otherwise dispose
of or transfer any shares of our common stock or securities convertible into or
exchangeable or exercisable for or repayable with our common stock, whether now
owned or later acquired by the person executing the agreement or with respect
to which the person executing the agreement later acquires the power of
disposition, or file any registration statement under the Securities Act
relating to any shares of our common stock; or enter into any swap or other
agreement or any other agreement that transfers, in whole or in part, the
economic consequence of ownership of our common stock whether any such swap or
transaction is to be settled by delivery of our common stock or other
securities, in cash or otherwise. Additionally, Messrs. Frank and Sam Khulusi
have each agreed, until December 8, 1999, 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. See "Shares Eligible for Future Sale."
Nasdaq National Market Listing
Our common stock is listed on the Nasdaq National Market under the symbol
"UBID."
Price Stabilization and Short Positions
Until the distribution of our common stock is completed, rules of the
Commission may limit the ability of the underwriters and selling group members
to bid for and purchase our common stock. As an exception to these rules, the
underwriters are permitted to engage in transactions that stabilize the price
of our common stock. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of our common stock.
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<PAGE>
The underwriters may create a short position in our common stock in
connection with the offering. This means that if they sell more shares of our
common stock than are set forth on the cover page of this prospectus, the
representatives may reduce that short position by purchasing our common stock
in the open market. The representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described
above.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the
representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Electronic Prospectus
A prospectus in electronic format is being made available on an Internet
Website maintained by Wit Capital Corporation. In addition, all dealers
purchasing shares from Wit Capital in the offering have agreed to make a
prospectus in electronic format available on Websites maintained by each of
these dealers. Purchases of shares from Wit Capital are to be made through an
account at Wit Capital in accordance with Wit Capital's procedures for opening
an account and transacting in securities.
Wit Capital Corporation, a member of the National Association of
Securities Dealers, Inc., will participate in the offering as one of the
underwriters. The National Association of Securities Dealers, Inc. approved the
membership of Wit Capital on September 4, 1997. Since that time, Wit Capital
has acted as an underwriter, e-Manager or selected dealer in over 125 public
offerings. Except for its participation as a manager in this offering, Wit
Capital has no relationship with uBid, or any of its founders or significant
stockholders.
Other Relationships
Some of the underwriters and their affiliates have from time to time
engaged in, and may in the future engage in, investment banking and other
commercial dealings in the ordinary course of business with us. They have
received customary fees and commissions for these transactions.
Passive Market Making
In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Exchange Act, during the business day prior to the pricing of the offering
before the commencement of offers or sales of our common stock. Passive market
makers must comply with applicable volume and price limitations and must be
identified as such. In general, a passive market maker must display its bid at
a price not in excess of the highest independent bid of such security; if all
independent bids are lowered below the passive market makers bid, however, such
bid must then be lowered when certain purchase limits are exceeded.
65
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
us by Morrison & Foerster LLP, Irvine, California. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Latham & Watkins, San Francisco, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements (and schedule) at December 31, 1998 and 1997 and for the year ended
December 31, 1998 and for the period from our inception to December 31, 1997,
as set forth in their report. We've included our financial statements (and
schedule) in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any reports, statements or other information on file at the Commission's public
reference room in Washington, D.C. You can request copies of those documents,
upon payment of a duplicating fee, by writing to the Commission.
We have filed with the Securities and Exchange Commission, Washington,
D.C. 20549, a Registration Statement on Form S-1 under the Securities Act of
1933, as amended, with respect to our common stock offered hereby. This
prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Certain items
are omitted in accordance with the rules and regulations of the Commission. For
further information with respect to us and our common stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part thereof. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and, in each instance, if such contract or document is filed as an
exhibit, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference to such exhibit. The Registration Statement,
including exhibits and schedules thereto, may be inspected without charge at
the public reference facilities maintained by the Commission in Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at the North Western Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor,
New York, NY 10048, and copies of all or any part thereof may be obtained from
such office after payment of fees prescribed by the Commission. The Commission
maintains a Website at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
66
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999
(unaudited).............................................................. F-3
Statements of Operations for the Period April 1, 1997 (Inception) to
December 31, 1997, the Year Ended December 31, 1998 and the six months
ended June 30, 1999 (unaudited)........................................... F-4
Statements of Cash Flows for the Period April 1, 1997 (Inception) to
December 31, 1997, the Year Ended December 31, 1998 and the six months
ended June 30, 1999 (unaudited)........................................... F-5
Statements of Changes in Stockholders' Equity (Deficit) for the Period
April 1, 1997 (Inception) to December 31, 1997, the Year Ended December
31, 1998 and the six months ended June 30, 1999 (unaudited)............... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
uBid, Inc.
Elk Grove Village, IL
We have audited the accompanying balance sheets of uBid, Inc. as of
December 31, 1997 and 1998, and the related statements of operations, cash
flows and changes in stockholders' equity for the period from April 1, 1997
(Inception) to December 31, 1997 and the year ended December 31, 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. at
December 31, 1997 and 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 year ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 22, 1999
F-2
<PAGE>
uBid, Inc.
BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
----------------- ----------
1997 1998 1999
------- -------- ----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash........................................... $ -- $ 26,053 $ 20,780
Accounts receivable, net of allowances of $20
and $37 at December 31, 1998 and June 30,
1999.......................................... 9 623 1,419
Merchandise inventories........................ 2 7,235 8,590
Prepaid expenses and other..................... 20 195 1,011
------- -------- --------
Total current assets......................... 31 34,106 31,800
Fixed assets, net.............................. 327 519 1,741
------- -------- --------
Total assets................................. $ 358 $ 34,625 $ 33,541
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................... $ -- $ 9,013 $ 12,401
Accrued marketing expense...................... -- 948 3,860
Accrued expenses and other current
liabilities................................... -- 1,423 1,607
Due to Creative ............................... -- 1,277 404
------- -------- --------
Total current liabilities.................... -- 12,661 18,272
Note payable to Creative....................... 670 3,331 3,331
Stockholders' equity (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 as of December 31, 1997 and
9,146,883 shares issued and outstanding as of
December 31, 1998 and June 30, 1999........... 1 2 2
Additional paid-in-capital..................... -- 37,138 37,138
Deferred compensation expense.................. -- (8,025) (6,206)
Accumulated deficit............................ (313) (10,482) (18,996)
------- -------- --------
Total stockholders' equity (deficit)......... (312) 18,633 11,938
------- -------- --------
Total liabilities and stockholders' equity
(deficit)................................... $ 358 $ 34,625 $ 33,541
======= ======== ========
</TABLE>
See notes to the financial statements.
F-3
<PAGE>
uBid, Inc.
STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
April 1, 1997 Six Months Ended
(Inception) to Year Ended June 30,
December 31, December 31, --------------------
1997 1998 1998 1999
-------------- ------------ --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Net revenues................ $ 9 $ 48,232 $ 8,826 $ 79,907
Cost of revenues............ 8 44,257 8,146 72,962
--------- --------- --------- ---------
Gross profit................ 1 3,975 680 6,945
Operating expenses:
Sales and marketing....... 10 2,829 557 6,607
Technology and
development.............. 66 1,022 405 1,576
General and
administrative........... 212 4,856 1,519 5,871
Stock based compensation.. -- 5,267 -- 1,819
--------- --------- --------- ---------
Total operating
expenses............... 288 13,974 2,481 15,873
Loss from operations........ (287) (9,999) (1,801) (8,928)
Interest income............. -- (74) -- (551)
Interest expense to
Creative................... 26 244 87 137
--------- --------- --------- ---------
Loss before income taxes.... (313) (10,169) (1,888) (8,514)
Provision for income taxes.. -- -- -- --
--------- --------- --------- ---------
Net loss.................... $ (313) $ (10,169) $ (1,888) $ (8,514)
========= ========= ========= =========
Basic and diluted net loss
per share.................. $ (0.04) $ (1.36) $ (0.26) $ (0.93)
========= ========= ========= =========
Shares used to compute basic
and diluted net loss per
share...................... 7,329,883 7,461,061 7,329,883 9,146,883
</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 Six Months Ended
(Inception) to Year Ended June 30,
December 31, December 31, ------------------
1997 1998 1998 1999
-------------- ------------ -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss..................... $ (313) $(10,169) $ (1,888) $ (8,514)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization.............. 4 155 65 174
Non cash compensation
expense................... -- 5,267 -- 1,819
Changes in operating assets
and liabilities:
Accounts receivable, net... (9) (614) (330) (796)
Prepaid expenses........... (20) (175) 10 (816)
Merchandise inventories,
net....................... (2) (7,233) (1,726) (1,355)
Accounts payable........... -- 9,013 1,773 3,388
Accrued marketing expense.. -- 948 259 2,912
Accrued expenses and other
current liabilities....... -- 1,423 469 184
Due to Creative............ -- 1,277 -- (873)
-------- -------- -------- --------
Net cash (used in) provided by
operating activities.......... (340) (108) (1,368) (3,877)
Cash flows from investing
activities:
Purchases of fixed assets.... (331) (347) (37) (1,396)
-------- -------- -------- --------
Net cash used in investing
activities.................... (331) (347) (37) (1,396)
Cash flows from financing
activities:
Issuance of common stock to
Creative.................... 1 -- -- --
Advances from Creative....... 670 (670) 1,774 --
Note payable to Creative..... -- 3,331 -- --
Proceeds from initial public
offering of common stock.... -- 23,847 -- --
Deferred offering costs...... -- -- (369) --
-------- -------- -------- --------
Net cash provided by financing
activities.................... 671 26,508 1,405 --
-------- -------- -------- --------
Net change in cash and cash
equivalents................... -- 26,053 -- (5,273)
Cash and cash equivalents at
beginning of period........... -- -- -- 26,053
-------- -------- -------- --------
Cash and cash equivalents at
end of period................. $ -- $ 26,053 $ -- $ 20,780
======== ======== ======== ========
</TABLE>
See notes to the financial statements.
F-5
<PAGE>
uBid, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Common stock Additional
------------- paid-in Deferred Accumulated
Shares Amount capital compensation deficit Total
------ ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to Creative............ 7,330 $ 1 $ -- $ -- $ -- $ 1
Net loss for the
period................. -- -- -- -- (313) (313)
----- --- ------- -------- -------- --------
Balance at December 31,
1997................... 7,330 $ 1 $ -- $ -- $ (313) $ (312)
Issuance of common stock
in IPO................. 1,817 1 23,846 -- -- 23,847
Stock based
compensation........... -- -- 13,292 (13,292) -- --
Amortization of stock
based compensation..... -- -- -- 5,267 -- 5,267
Net loss for the year... -- -- -- -- (10,169) (10,169)
----- --- ------- -------- -------- --------
Balance at December 31,
1998................... 9,147 $ 2 $37,138 $ (8,025) $(10,482) $ 18,633
Amortization of stock
based compensation
(unaudited)............ -- -- -- 1,819 -- 1,819
Net loss for the period
(unaudited)............ -- -- -- -- (8,514) (8,514)
----- --- ------- -------- -------- --------
Balance at June 30, 1999
(unaudited)............ 9,147 $ 2 $37,138 $ (6,206) $(18,996) $ 11,938
===== === ======= ======== ======== ========
</TABLE>
See notes to the financial statements.
F-6
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Information as of and for the six months ended June 30, 1998 and 1999 is
unaudited)
1. Description of Company and Summary of Significant Accounting Policies
Description of Company
The Company 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 was established by Creative Computers ("Creative") in April
1997 and was incorporated in Delaware in September 1997 as a wholly-owned,
indirect subsidiary of Creative. Beginning on April 1, 1997 ("Inception"),
prior to the formation of the Company, Creative 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 from 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 Creative's basis. The financial statements have been
prepared as if the Company operated as a stand-alone entity since Inception.
Cash Equivalents
All highly liquid debt instruments purchased with a maturity of three
months or less are considered cash equivalents.
Revenue Recognition
The Company sells merchandise from suppliers 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 suppliers. For the year ended December 31, 1998 and the
six months ended June 30, 1999, the Company's sales of purchased inventory
comprised approximately 96% and 90% of revenues, respectively, with
consignment-type revenue sharing representing approximately 4% and 10% of
revenues, respectively. The Company recognizes revenue for banner ads placed on
the site during the period in which the advertisement is displayed, provided
that no significant Company obligations remain at the end of the period and
collection of the resulting receivable is probable.
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, December 31, 1998, or June 30, 1999.
Sales--revenue sharing agreements
For sales of merchandise under revenue sharing agreements, the Company
either takes physical possession of the merchandise or the supplier 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
F-7
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1998 and 1999 is
unaudited)
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, December 31, 1998, or June 30, 1999.
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
it may not be 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. Leasehold improvements are stated at cost
and depreciation is computed using the straight-line method over the shorter of
the useful life of the asset or the term of the lease.
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, $39 was
expensed. For the year ended December 31, 1998 and the six months ended June
30, 1999, no software development costs were expensed. As of December 31, 1997,
December 31, 1998, and June 30, 1999, capitalized software net of accumulated
amortization was $264, $176 and $283, respectively.
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising expense
was $0 and $2,669 for the periods ended December 31, 1997 and December 31,
1998, respectively and $499 and $6,394 for the six months ended June 30, 1998
and 1999, respectively.
F-8
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1998 and 1999 is
unaudited)
The Company has marketing relationships with a number of online companies
including AOL, MSN/LinkExchange, PCWorld Online, LookSmart and Prodigy pursuant
to which it receives portal positioning, anchor tenancy, promotional
placements, sponsorships and/or banner advertisements for a monthly fee.
Generally, these agreements have terms up to three years, do not provide for
guaranteed renewal and may be terminated by the Company without cause. The
Company's payments to these online companies for the six months ended June 30,
1999 were approximately $1,300 and payments for the second half of 1999 under
these agreements will be up to approximately $2,000, which does not include
certain additional fees such as payments for producing a certain level of new
registrations. There were no payments made under these agreements for 1997, and
payments to these online companies for the six months ended June 30, 1998 and
the twelve months ended December 31, 1998 were approximately $87 and $433,
respectively. With respect to the payments required under these agreements, the
Company will recognize the fees as sales and marketing expenses over the
greater of the ratio of the number of impressions delivered over the total
number of contracted impressions, or a straight-line basis over the term of the
contract.
Income Taxes
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 Creative for the period prior to the spin-off (see Notes 6 and 8). 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 stock options as prescribed by APB Opinion No.
25 and includes pro forma information in the Stock options footnote, as
permitted by Statement of Financial Accounting Standards (SFAS) No. 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 period ended December 31, 1997, the year ended
December 31, 1998, and the six months ended June 30, 1998 and 1999, options to
purchase 458,118, 1,107,278, 850,632 and 2,388,124 common shares, respectively,
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 Suppliers
The Company is dependent upon suppliers to provide it with merchandise
for sale through the Company's Internet auctions. For the period from Inception
to December 31, 1997 one supplier, Creative,
F-9
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1998 and 1999 is
unaudited)
accounted for approximately 100% of net revenues from related product sales.
For the twelve-month period ended December 31, 1998 and six months ended June
30, 1999, Creative accounted for approximately 6% and 4%, respectively, 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 Splits
On June 25, 1998, the Company effected a 100,000-for-1 split of its
Common Stock. On November 30, 1998, the Company effected a .7329883-for-1
reverse split of its common stock. All common shares and per share data have
been retroactively adjusted to reflect these stock splits.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and, in opinion of
management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the Company's financial position,
results of operations and cash flows as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999.
2. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
------ ------ --------
<S> <C> <C> <C>
Computer, machinery and equipment................. $ 64 $ 372 $1,345
Computer software................................. 267 306 399
Leasehold improvements............................ -- -- 326
----- ------ ------
331 678 2,070
Less accumulated depreciation and amortization.... (4) (159) (329)
----- ------ ------
$ 327 $ 519 $1,741
===== ====== ======
</TABLE>
3. Related Party Transactions
Since Inception, Creative provided advances to the Company for working
capital and fixed asset purchases of $670 and $3,331 through December 31, 1997
and December 31, 1998, respectively. Upon consummation of the Company's initial
public offering (IPO) (see Note 6), the $3,331 was converted to a note payable
to Creative. The outstanding balance on the note bears interest at the prime
rate and will be repaid in June 2000. Interest expense on intercompany advances
and notes payable was $26, $244, $137 and $87 for the
F-10
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1998 and 1999 is
unaudited)
period ended December 31, 1997, the year ended December 31, 1998, and the six
months ended June 30, 1999 and 1998, respectively. In addition, from the date
of the IPO until December 31, 1998, Creative advanced the Company an additional
$1,277 in short-term non-interest bearing advances. The advances relate to cash
disbursements made by Creative on behalf of the Company during the transition
period while the Company establishes its own cash management programs. These
advances are settled on at least a monthly basis. During the transition period,
the Company will continue to participate in Creative's cash management process.
In connection therewith, cash receipts related to the Company's business are
applied directly to reduce the Advances from Creative. At June 30, 1999, there
was $404 in short-term, non-interest bearing advances.
In addition, Creative provides various services such as administration
(accounting, human resources, legal) (through June 7, 1999), warehousing and
distribution (through June 1998), Internet/telecom and joint marketing services
to the Company. In consideration for those services, Creative 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 Six Months
April 1, 1997 Ended
(Inception) to Year Ended June 30,
December 31, December 31, -----------
1997 1998 1998 1999
-------------- ------------ ----- -----
<S> <C> <C> <C> <C>
Administrative................... $ 36 $ 481 $ 249 $ 321
Warehousing and distribution..... -- 550 164 293
Internet/telecom and joint
marketing....................... 172 773 503 277
---- ------ ----- -----
$208 $1,804 $ 916 $ 891
==== ====== ===== =====
</TABLE>
Administration costs for services provided by Creative to the Company
were determined by identifying all of Creative'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 Creative'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 Creative at its marginal
cost. In October 1998, the sublease was increased to 100,000 square feet on 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 Creative are reasonable.
The Company and Creative entered into on or prior to the consummation of
the IPO, certain agreements governing various interim and ongoing
relationships, including subleasing a portion of Creative's warehouse, between
the Company and Creative after the completion of the anticipated IPO and
subsequent Distribution. The terms of such agreements generally provide for
services to be rendered by Creative similar to those described above. The costs
of general accounting services, payroll and benefits administration, and
Internet/telecommunications are charged based on Creative's cost plus 10%.
Credit services are charged at $1.50 per transaction. For warehousing and
distribution, effective July 1, 1998, the Company is subleasing a portion of
Creative's distribution facility pursuant to a sublease agreement and is being
charged a pro rata
F-11
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1998 and 1999 is
unaudited)
portion of Creative's occupancy costs for this facility. Pursuant to the
Sublease Agreement, future minimum lease payments to Creative are $275 annually
in 1999 through 2002 and $206 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 to Creative. The agreement
pursuant to which Creative provides the Company with certain administrative and
transactional services will be terminated upon completion of the Separation and
the Distribution.
One of the Company's directors also serves as an officer and a director
of Creative.
4. Income Taxes
No tax benefit has been provided for the periods ended December 31, 1997
and December 31, 1998 pretax losses due to the uncertainty of realization of
these benefits in future years.
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, June 30,
--------------- ----------
1997 1998 1998 1999
------ ------ ---- ----
<S> <C> <C> <C> <C>
Expected taxes at federal statutory tax
rate...................................... 34% 34% 34% 34%
Nonrecognition of tax benefits............. (34) (34) (34) (34)
------ ------ --- ---
--% --% --% --%
------ ------ --- ---
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
----- -------
<S> <C> <C>
Deferred tax assets:
Start-up and development costs........................... $ 105 $ 84
Net operating loss....................................... 10 1,990
Stock based compensation................................. -- 2,107
Other.................................................... 10 12
----- -------
125 4,193
Valuation allowance...................................... (125) (4,193)
----- -------
$ -- $ --
===== =======
</TABLE>
The cumulative amount of the deferred tax attributes for the Company at
December 31, 1997 and 1998 is $125 and $4,193, respectively. Of this amount $10
and $1,990 relates to the total cumulative net operating losses incurred by the
Company through December 31, 1997 and 1998, respectively. Such net operating
losses expire in 2012 ($10) and 2018 ($1,980).
5. Employee Benefits
401(k) Savings Plan
Creative has a 401(k) Savings Plan that covers substantially all Company
full-time employees. Participants may make tax-deferred contributions of up to
15% of annual compensation (subject to other
F-12
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1998 and 1999 is
unaudited)
limitations specified by the Internal Revenue Code). Administrative and
matching costs, which were charged to the Company by Creative, were not
significant for the period from Inception to December 31, 1997 or for the
twelve-month period ended December 31, 1998.
Employee Stock Option Plans
The Company has granted non-qualified options to certain employees and
directors of the Company to purchase common stock. Each option agreement
provides that options may not be exercised prior to the earlier of (i) the day
following the distribution of all Company stock held by Creative to its
shareholders or (ii) 18 months from the closing date of the Company's IPO.
Accordingly, no options were exercisable at December 31, 1998.
The terms of the options provide for vesting, over a 4 or 5-year period,
except for options to purchase 183,247 shares of common stock at December 31,
1998 which vested as to the first 20% of the shares covered by such options
upon completion of the Company's IPO. The options expire 10 years from the date
of grant.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number Price
--------- --------
<S> <C> <C>
Granted................................................ 458,118 $ 0.27
Canceled............................................... --
Exercised.............................................. --
--------- ------
Outstanding at December 31, 1997..................... 458,118 $ 0.27
Granted................................................ 651,725 $ 4.62
Canceled............................................... (2,565) $ 0.27
Exercised.............................................. --
--------- ------
Outstanding at December 31, 1998..................... 1,107,278 $ 2.79
Granted................................................ 1,284,846 $32.24
Canceled............................................... (4,000) 70.98
Exercised.............................................. --
--------- ------
Outstanding at June 30, 1999......................... 2,388,124 $18.62
========= ======
</TABLE>
The options outstanding at December 31, 1997 all have an exercise price
of $0.27. Of the options granted during the year ended December 31, 1998,
options to purchase 370,526, 18,325, 109,948, 1,832, 79,529 and 69,000 common
shares are outstanding and have exercise prices of $0.27, $6.82, $8.87, $10.20,
$11.79 and $15.00, respectively. Options at December 31, 1998 have a weighted
average estimated remaining life of 5.95 years.
Beginning in 1997, the Company granted stock options to attract and
retain key employees. These options were exercisable only in the event of a
successful public offering or sale of the Company. The Company commenced its
IPO on December 4, 1998 causing a measurement date to occur and requiring the
F-13
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1998 and 1999 is
unaudited)
Company 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 IPO price of $15.00 per share and the exercise prices of the
1,038,278 options outstanding at December 4, 1998, the total compensation
charge will be approximately $13.3 million, which will be recognized over the
vesting period. The Company recognized approximately $5.3 million of this
charge in December 1998 and approximately $1.8 million in the first six months
of 1999.
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 for those
options granted prior to the IPO, and the Black-Scholes option pricing method
for those options issued concurrent with the IPO, with the following weighted
average assumptions:
<TABLE>
<CAPTION>
Minimum Value Black-Scholes
Assumptions Assumptions
------------- -------------
<S> <C> <C>
Risk free interest rate........................ 6.30% 4.89%
Expected dividend yield........................ None None
Expected lives................................. 6 years 6 years
Expected volatility............................ 100% 142%
</TABLE>
The weighted average grant date fair values of options granted during the
twelve months ended December 31, 1998 and the period from Inception to December
31, 1997 were $4.03 and $0.08, respectively.
Had the Company accounted for stock options under SFAS No. 123, reported
net loss for the year ended December 31, 1998 would have been $5,172 and net
loss per share would have been $0.69. The effect of applying SFAS No. 123 on
net income and earnings per share is not likely to be representative of the
effect on reported net income and earnings per share for future years.
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
("ISOs") or non-qualified stock options ("NSOs"). ISOs may be granted only to
employee (including officers and directors who are also employees). Awards
other than ISOs 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 were no options granted under the 1998 Plan through December 31,
1998 and options to purchase 1,280,846 shares granted at fair value under the
1998 Plan through June 30, 1999.
F-14
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1998 and 1999 is
unaudited)
6. Initial Public Offering of Common Stock
In December 1998, the Company completed its IPO of 1,817,000 shares
common stock. Based on the initial public offering price of $15.00 per share,
the gross proceeds from the offering were $27,255. After commissions paid to
the underwriters, and other offering costs, the net proceeds were $23,846.
Following the completion of the IPO, Creative owned approximately 80% of the
Company's outstanding Common Stock and as a result, continued to control the
Company. Creative also announced that, subject to the completion of the IPO, it
intends to distribute to its shareholders in 1999, subject to certain
conditions and consents, all of Creative's remaining equity interest in the
Company (see Note 8).
7. Segment Information
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131 "Disclosure about Segments of an Enterprise and Related Information"
(SFAS No. 131). This statement requires companies to report financial and
descriptive information about its reportable operating segments, including
segment profit or loss, certain specific revenue and expense items, and segment
assets, as well as information about the revenues derived from the Company's
products or services, the countries in which the company earns revenues and
holds assets, and major customers. This statement also requires companies that
have a single reportable segment to disclose information about products and
services, information about geographic areas, and information about major
customers. The statement requires the use of the management approach to
determine the information to be reported. The management approach is based on
the way management organizes the enterprise to assess performance and make
operating decisions regarding the allocation of resources. It is management's
opinion that the Company has only one reportable segment. The following
discussion sets forth the required single segment information.
F-15
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1998 and 1999 is
unaudited)
The Company operates as a single reportable segment as an online auction
for computer, consumer electronics and housewares, and sports and recreation
products in the United States. The Company's revenues are divided into two
categories; sales of merchandise that has been purchased by the Company
(approximately 96% of revenues) and sales of merchandise under consignment-type
revenue sharing agreements with suppliers (approximately 4% of revenues). The
Company sources its products from over 300 suppliers and offers, on average,
over 1,000 items in each of its auctions. Product offerings are divided into
the following four categories, with their corresponding percentage of net
revenues for the year ended December 31, 1998 and six months ended June 30,
1998 and 1999:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30,
December 31, -----------------
1998 1998 1999
------------ -------- --------
<S> <C> <C> <C>
Computer Products--including desktops, 83% 100% 77%
portable computers, computer
accessories, disk drives, modems,
monitors / video equipment,
components, printers, scanners,
digital cameras, software and home
office products.
Consumer Electronics--including home 11% 0% 15%
theater equipment, home audio
equipment, speakers, televisions,
camcorders, VCR's, DVD players,
portable audio players and automobile
audio equipment.
Housewares--including kitchen 6% 0% 5%
appliances, vacuum cleaners, personal
care devices, furniture, gifts,
photography, jewelry and sunglasses.
Sports and Recreation--including sports 0% 0% 3%
memorabilia, golf and tennis, health
and fitness, outdoor sports, bicycles,
water sports, and team sports
equipment.
</TABLE>
All of the Company's revenues in 1997 were in the computer products
category.
8. Distribution to Creative Shareholders (unaudited)
On June 7, 1999, Creative distributed to its stockholders its remaining
equity interest in the Company consisting of 7,329,883 shares of common stock.
In connection with the spin-off, options to purchase common stock of Creative
that were outstanding as of the date of the spin-off were adjusted to become
options to purchase shares of both Creative common stock and Company common
stock. The Company issued options to purchase 528,313 shares of common stock to
holders of these Creative options. The number of options to purchase common
stock was based on the ratio of the number of shares of Company common stock
distributed to Creative shareholders in the spin-off, divided by the total
number of shares of Creative common stock outstanding on the record date for
the spin-off. The exercise price for each adjusted option was allocated between
the option to purchase Creative common stock and the option to purchase Company
common stock based on the respective pre- and post-distribution prices of
Creative and Company common stock. Such options were issued under the Company's
1998 Stock Incentive Plan.
F-16
<PAGE>
DESCRIPTION of INSIDE BACK COVER OF PROSPECTUS
The following text appears in the upper left corner of the page: "Wide range of
brand name products where you set the price."
The following text appears in the lower right side of the page: "Easy access to
online shoppers for our vendors and manufacturers."
The uBid logo appears in the lower left corner of the page.
The following pictures of merchandise appear throughout the page: watch, laptop
computer, camcorder, food processor, golf clubs, satellite dish, elliptical
exercise equipment, desktop computer and barbecue grill.
<PAGE>
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2,000,000 Shares
[LOGO OF uBID APPEARS HERE]
Common Stock
----------------
PROSPECTUS
----------------
Merrill Lynch & Co.
Banc of America Securities LLC
William Blair & Company
Wit Capital Corporation
, 1999
---------------------------------------------------------------------------
---------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses to be paid by the Registrant in connection with the
distribution of the securities being registered, other than underwriting
discounts and commissions, are as follows:
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
Securities and Exchange Commission Filing Fee.................... $ 19,886
NASD Filing Fee.................................................. 7,653
Nasdaq National Market Listing Fee............................... 17,500
Accounting Fees and Expenses..................................... 100,000
Blue Sky Fees and Expenses....................................... 5,000
Legal Fees and Expenses.......................................... 200,000
Transfer Agent and Registrar Fees and Expenses................... 5,000
Printing Expenses................................................ 225,000
Miscellaneous Expenses........................................... 19,961
--------
Total.......................................................... $600,000
========
</TABLE>
- --------
* All amounts are estimates except the SEC filing fee, the NASD filing fee and
the Nasdaq National Market listing fee.
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 (1) any breach of the
director's duty of loyalty to the corporation or its stockholders, (2) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) payments of unlawful dividends or unlawful stock
repurchases or redemptions, or (4) 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
Securities Act, and affords certain rights of contribution with respect
thereto.
The Separation and Distribution Agreement by and between the Company and
Creative provides for indemnification by the Company of Creative and its
directors, officers and employees for certain liabilities, including
liabilities under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
For the period from December 31, 1997 until its December 4, 1998 initial
public offering, the Registrant granted stock options to employees, directors
and consultants covering an aggregate of 1,107,278 shares of the Registrant's
common stock, at exercise prices ranging from $0.27 to $15.00 with an average
exercise price of $2.79 per share.
The sale and issuance of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act by virtue
of Rule 701 promulgated thereunder in that they were offered and sold either
pursuant to written compensatory benefit plans or pursuant to a written
contract relating to compensation, as provided by Rule 701 or were deemed to be
exempt from registration under the Securities Act by virtue of Section 4(2)
thereof.
Appropriate legends were affixed to the stock certificates issued in the
above transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. No underwriters were employed in any
of the above transactions.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
The exhibits are as set forth in the Exhibit Index.
(b) Financial Statement Schedules
The following financial statement schedule for the period April 1, 1997
(Inception) to December 31, 1997 and for the year ended December 31, 1998 is
incorporated by reference from the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 and should be read in conjunction with the
financial statements of uBid, Inc. filed as part of this Registration
Statement:
Schedule II--Valuation and Qualifying Accounts
Schedules other than that listed above have been omitted since they are
either not required, not applicable, or because the information required is
included in the financial statements or related notes.
II-2
<PAGE>
Item 17. Undertakings
The Registrant hereby undertakes to provide the underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "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
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the 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 Act shall be deemed to be part of this Registration Statement as of
the time the Commission declared it effective.
(2) For purposes of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities therein, and this
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, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Elk Grove
Village, Illinois on August 30, 1999.
uBID, INC.
/s/ Gregory K. Jones
By: _________________________________
Gregory K. Jones
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed 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 of the Board of August 30, 1999
____________________________________ Directors, President and Chief
Gregory K. Jones Executive Officer (Principal
Executive Officer)
/s/ Thomas E. Werner Chief Financial Officer August 30, 1999
____________________________________ (Principal Financial and
Thomas E. Werner Accounting Officer)
* Director August 30, 1999
____________________________________
Frank F. Khulusi
* Director August 30, 1999
____________________________________
Mark C. Layton
* Director August 30, 1999
____________________________________
Allen U. Lenzmeier
* Director August 30, 1999
____________________________________
Howard A. Tullman
* Director August 30, 1999
____________________________________
Norman H. Wesley
</TABLE>
/s/ Thomas E. Werner
*By: ______________________
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1 Form of Purchase Agreement(5)
3.1 Restated Certificate of Incorporation of the Company(2)
3.2 Amended and Restated By-Laws of the Company(2)
4.1 Form of the Company's Common Stock Certificate(2)
4.2 [Intentionally omitted]
4.3 Registration Rights Agreement by and between the Company and Frank
Khulusi and Sam Khulusi, dated as of December 7, 1998(2)
5.1 Opinion of Morrison & Foerster LLP(5)
8.1 Opinion of PricewaterhouseCoopers LLP(5)
10.1 Separation and Distribution Agreement by and between the Company and
Creative dated as of December 7, 1998, as amended(4)
10.2 Services Agreement by and between the Company and Creative, dated as
of December 7, 1998(2)
10.3 Tax Indemnification and Allocation Agreement by and between the
Company and Creative, dated as of December 7, 1998, as amended(3)
10.4 Joint Marketing Agreement by and between the Company and Creative,
dated as of December 7, 1998(2)
10.5 Internet/Telecommunications Agreement by and between the Company and
Creative, dated as of December 7, 1998(2)
10.6 Employment Agreement between the Company and Gregory K. Jones*(2)
10.7 uBid, Inc. 1998 Stock Incentive Plan*(2)
10.8 Sublease Agreement between the Company and Creative, dated as of
July 1, 1998(2)
10.9 [intentionally omitted]
10.10 Agreement Restricting Transfer of Assets and Letter Agreement dated
as of September 23, 1998 by and between Deutsche Financial Services
Corporation and Creative and the Company(2)
10.11 Letter Agreement dated November 30, 1998 by and between Creative and
Paul Colton(2)
10.12 Letter Agreement dated September 9, 1998 by and between Creative and
David Matthews(2)
10.13 Assignment and License Agreement by and between the Company and
Creative, dated as of November 30, 1998(2)
10.14 Form of Indemnification Agreement, entered into as of February 12,
1999, between the Company and each of its directors and executive
officers(3)
10.15+ Program License and Professional Services Agreement, dated as of
June 14, 1999, by and between uBid, Inc. and LibertyOne Limited(6)
10.16+ Office Lease between 8550 Bryn Mawr, LLC and uBid, Inc.(5)
23.1 Consent of Morrison & Foerster LLP (included in Exhibit 5.1)(5)
23.2 Consent of Ernst & Young LLP(5)
23.3 Consent of PricewaterhouseCoopers LLP (included in Exhibit 8.1)(5)
27 Financial Data Schedule (for Commission use only)(1)
99 Schedule II--Valuation and Qualifying Accounts(3)
</TABLE>
- --------
* The referenced exhibit is a compensatory contract, plan or arrangement.
(1) Previously filed.
(2) Incorporated by reference to the exhibit with the same number to the
Company's Registration Statement on Form S-1 (No. 333-58477), on file with
the Securities and Exchange Commission.
<PAGE>
(3) Incorporated by reference to the exhibit or schedule with the same number
to the Company's Annual Report on Form 10-K for the year ended December 31,
1998, on file with the Securities and Exchange Commission.
(4) Incorporated by reference to Exhibit 10.1 of the Report on Form 8-K of
Creative Computers, Inc. dated May 27, 1999, filed on May 28, 1999 with the
Securities and Exchange Commission.
(5) Filed herewith.
(6) Incorporated by reference to Exhibit 10.15 of the Company's Report on Form
10-Q for the period ended June 30, 1999.
+ Confidential treatment has been requested for portions of this agreement
pursuant to an application for confidential treatment sent to the Securities
and Exchange Commission. Such portions have been redacted and marked with an
asterisk. The non-redacted version of this document has been sent to the
Securities and Exchange Commission.
<PAGE>
===============================================================================
uBID, INC.
(a Delaware corporation)
2,000,000 Shares of Common Stock
PURCHASE AGREEMENT
------------------
_____________, 1999
===============================================================================
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
PURCHASE AGREEMENT....................................................... 1
SECTION 1. Representations and Warranties.............................. 2
(a) Representations and Warranties by the Company..................... 2
(i) Compliance with Registration Requirements....................... 2
(ii) Independent Accountants........................................ 3
(iii) Financial Statements.......................................... 3
(iv) No Material Adverse Change in Business........................ 4
(v) Good Standing of the Company.................................... 4
(vi) Good Standing of Subsidiaries.................................. 4
(vii) Capitalization................................................ 4
(viii) Authorization of Purchase Agreement.......................... 4
(ix) Authorization and Description of Securities.................... 4
(x) Absence of Defaults and Conflicts............................... 5
(xi) Absence of Labor Dispute....................................... 5
(xii) Absence of Proceedings........................................ 5
(xiii) Accuracy of Exhibits......................................... 6
(xiv) Possession of Intellectual Property........................... 6
(xv) Absence of Further Requirements................................ 6
(xvi) Possession of Licenses and Permits............................ 6
(xvii) Title to Property............................................ 6
(xviii) Investment Company Act...................................... 7
(xix) Environmental Laws............................................ 7
(xx) Registration Rights............................................ 7
(xxi) Tax Matters................................................... 7
(xxii) Internal Accounting Controls................................. 8
(xxiii) Adequacy of Insurance....................................... 8
(xxiv) ERISA Compliance............................................. 8
(xxv) Year 2000 Issues.............................................. 8
(xxvi) Tax-Free Status of Spin-off.................................. 8
(b) Officer's Certificates............................................ 8
SECTION 2. Sale and Delivery to Underwriters; Closing................... 8
(a) Initial Securities................................................ 8
(b) Option Securities................................................. 9
(c) Payment........................................................... 9
(d) Denominations; Registration....................................... 10
SECTION 3. Covenants of the Company..................................... 10
(a) Compliance with Securities Regulations and Commission Requests.... 10
(b) Filing of Amendments.............................................. 10
(c) Delivery of Registration Statements............................... 10
(d) Delivery of Prospectuses.......................................... 11
(e) Continued Compliance with Securities Laws......................... 11
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(f) Blue Sky Qualifications........................................... 11
(g) Rule 158.......................................................... 11
(h) Use of Proceeds................................................... 11
(i) Listing........................................................... 12
(j) Restriction on Sale of Securities................................. 12
(k) Reporting Requirements............................................ 12
SECTION 4. Payment of Expenses.......................................... 12
(a) Expenses.......................................................... 12
(b) Termination of Agreement.......................................... 13
SECTION 5. Conditions of Underwriters' Obligations...................... 13
(a) Effectiveness of Registration Statement........................... 13
(b) Opinion of Counsel for Company.................................... 13
(c) Opinion of PricewaterhouseCoopers LLP............................. 13
(d) Opinion of Counsel for Underwriters............................... 13
(e) Officers' Certificate............................................. 14
(f) Accountants' Comfort Letter....................................... 14
(g) Bring-down Comfort Letter......................................... 14
(h) Approval of Listing............................................... 14
(i) No Objection...................................................... 14
(j) Lock-up Agreements................................................ 14
(k) Conditions to Purchase of Option Securities....................... 14
(l) Additional Documents.............................................. 15
(m) Termination of Agreement.......................................... 15
SECTION 6. Indemnification.............................................. 15
(a) Indemnification of Underwriters................................... 15
(b) Indemnification of Company, Directors and Officers................ 16
(c) Actions against Parties; Notification............................. 17
(d) Settlement without Consent if Failure to Reimburse................ 17
SECTION 7. Contribution................................................. 18
SECTION 8. Representations, Warranties and Agreements
to Survive Delivery......................................... 19
SECTION 9. Termination of Agreement..................................... 19
(a) Termination; General.............................................. 19
(b) Liabilities....................................................... 19
SECTION 10. Default by One or More of the Underwriters.................. 19
SECTION 11. Notices..................................................... 20
SECTION 12. Parties..................................................... 20
SECTION 13. Governing Law and Time...................................... 19
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SECTION 14. Effect of Headings......................................... 21
SECTION 15. Miscellaneous.............................................. 21
SCHEDULES
Schedule A - List of Underwriters............................... Sch A-1
Schedule B - Pricing Information................................ Sch B-1
Schedule C - List of Persons Subject to Lock-up................. Sch C-1
EXHIBITS
Exhibit A - Form of Opinion of Company's Counsel.................. A-1
Exhibit B - Form of Lock-up Letter................................ B-1
Exhibit C - Form of Lock-up Letter signed by
Messrs. Frank and Sam Khulusi....................... C-1
</TABLE>
iii
<PAGE>
uBID, INC.
(a Delaware corporation)
2,000,000 Shares of Common Stock
(Par Value $.001 Per Share)
PURCHASE AGREEMENT
____________, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Banc of America Securities LLC
William Blair & Company, L.L.C.
Wit Capital Corporation
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
uBid, Inc., a Delaware corporation (the "Company") confirms its agreement
with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and each of the other Underwriters named in Schedule A hereto
----------
(collectively, the "Underwriters", which term shall also include any underwriter
substituted as hereinafter provided in Section 10 hereof), for whom Merrill
Lynch, Banc of America Securities LLC, William Blair & Company, L.L.C. and Wit
Capital Corporation are acting as representatives (in such capacity, the
"Representatives"), with respect to the issue and sale by the Company and the
purchase by the Underwriters, acting severally and not jointly, of the
respective numbers of shares of Common Stock, par value $.001 per share, of the
Company ("Common Stock") set forth in said Schedule A, and with respect to the
----------
grant by the Company to the Underwriters, acting severally and not jointly, of
the option described in Section 2(b) hereof to purchase all or any part of
300,000 additional shares of Common Stock to cover over-allotments, if any. The
aforesaid 2,000,000 shares of Common Stock (the "Initial Securities") to be
purchased by the Underwriters and all or any part of the 300,000 shares of
Common Stock subject to the option described in Section 2(b) hereof (the "Option
Securities") are hereinafter called, collectively, the "Securities".
The Company understands that the Underwriters propose to make a public
offering of the
<PAGE>
Securities as soon as the Representatives deem advisable after this Agreement
has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-83319) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"Securities Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the
Securities Act (the "Securities Act Regulations") and paragraph (b) of Rule 424
("Rule 424(b)") of the Securities Act Regulations or (ii) if the Company has
elected to rely upon Rule 434 ("Rule 434") of the Securities Act Regulations,
prepare and file a term sheet (a "Term Sheet") in accordance with the provisions
of Rule 434 and Rule 424(b). The information included in any such prospectus or
in any such Term Sheet, as the case may be, that was omitted from such
registration statement at the time it became effective but that is deemed to be
part of such registration statement at the time it became effective (a) pursuant
to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b)
pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information".
Each prospectus used before such registration statement became effective, and
any prospectus that omitted, as applicable, the Rule 430A Information or the
Rule 434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus". Such registration statement, including the exhibits thereto and
schedules thereto at the time it became effective and including the Rule 430A
Information and the Rule 434 Information, as applicable, is herein called the
"Registration Statement". Any registration statement filed pursuant to Rule
462(b) of the Securities Act Regulations is herein referred to as the "Rule
462(b) Registration Statement", and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final
prospectus in the form first furnished to the Underwriters for use in connection
with the offering of the Securities is herein called the "Prospectus". If Rule
434 is relied on, the term "Prospectus" shall refer to the preliminary
prospectus dated August 31, 1999 together with the Term Sheet and all references
in this Agreement to the date of the Prospectus shall mean the date of the Term
Sheet. For purposes of this Agreement, all references to the Registration
Statement, any preliminary prospectus, the Prospectus or any Term Sheet or any
amendment or supplement to any of the foregoing shall be deemed to include the
copy filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
------------------------------
(a) Representations and Warranties by the Company. The Company represents
and warrants to each Underwriter as of the date hereof, as of the Closing Time
referred to in Section 2(c) hereof, and as of each Date of Delivery (if any)
referred to in Section 2(b) hereof, and agree jointly and severally with each
Underwriter, as follows:
(i) Compliance with Registration Requirements. Each of the
-----------------------------------------
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the Securities Act and no proceedings for
that purpose have been instituted or are pending or, to the
2
<PAGE>
knowledge of the Company, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with. At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities are
purchased, at the Date of Delivery), the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements of
the Securities Act and the Securities Act Regulations and did not and will
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. Neither the Prospectus nor any
amendments or supplements thereto (including any prospectus wrapper), at
the time the Prospectus or any such amendment or supplement was issued and
at the Closing Time (and, if any Option Securities are purchased, at the
Date of Delivery), included or will include an untrue statement of a
material fact or omitted or will omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. If Rule 434 is used, the
Company will comply with the requirements of Rule 434 and the Prospectus
shall not be "materially different", as such term is used in Rule 434, from
the prospectus included in the Registration Statement at the time it became
effective. The representations and warranties in this Subsection shall not
apply to statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through Merrill
Lynch expressly for use in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act, complied
when so filed in all material respects with the Securities Act Regulations
and each preliminary prospectus and the Prospectus delivered to the
Underwriters for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
-----------------------
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the Securities
Act and the Securities Act Regulations.
(iii) Financial Statements. The financial statements included in
--------------------
the Registration Statement and the Prospectus, together with the related
schedules and notes, present fairly the financial position of the Company
at the dates indicated and the statement of operations, changes in
stockholder's deficit and cash flows of the Company for the periods
specified; said financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP") applied on a consistent
basis throughout the periods involved. The supporting schedules included
in the Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data and
the summary financial information included in the Prospectus
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present fairly the information shown therein and have been compiled on a
basis consistent with that of the audited financial statements included in
the Registration Statement.
(iv) No Material Adverse Change in Business. Since the
--------------------------------------
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein, (A) there
has been no material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of
the Company, whether or not arising in the ordinary course of business (a
"Material Adverse Effect"), (B) there have been no transactions entered
into by the Company, other than those in the ordinary course of business,
which are material with respect to the Company, and (C) there has been no
dividend or distribution of any kind declared, paid or made by the Company
on any class of its capital stock.
(v) Good Standing of the Company. The Company has been duly
----------------------------
organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its obligations
under this Agreement; and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not result
in a Material Adverse Effect.
(vi) Subsidiaries. The Company has no subsidiaries.
------------
(vii) Capitalization. The authorized, issued and outstanding
--------------
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or options
referred to in the Prospectus). The shares of issued and outstanding
capital stock of the Company have been duly authorized and validly issued
and are fully paid and non-assessable; none of the outstanding shares of
capital stock of the Company was issued in violation of the preemptive or
other similar rights of any securityholder of the Company.
(viii) Authorization of Purchase Agreement. This Agreement has
-----------------------------------
been duly authorized, executed and delivered by the Company.
(ix) Authorization and Description of Securities. The Securities
-------------------------------------------
have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the consideration set forth
herein, will be validly issued and fully paid and non-assessable; the
Common Stock conforms to all statements relating thereto contained in the
Prospectus and such description conforms to the rights set forth in the
instruments defining the same; no holder of the Securities will be subject
to personal liability by reason of being such a holder; and the issuance of
the Securities is not subject to the preemptive or other similar rights of
any securityholder of the Company.
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<PAGE>
(x) Absence of Defaults and Conflicts. The Company is not in
---------------------------------
violation of its charter or bylaws or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in
the Separation and Distribution Agreement or the Tax Indemnification and
Allocation Agreement, in each case dated as of December 7, 1998, by and
between the Company and Creative Computers, Inc., a Delaware corporation
("Creative"), or any other contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument to
which the Company is a party or by which it may be bound, or to which any
of the property or assets of the Company is subject (collectively,
"Agreements and Instruments") except for such defaults that would not
result in a Material Adverse Effect; and the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein and in the Registration Statement (including the
issuance and sale of the Securities and the use of the proceeds from the
sale of the Securities as described in the Prospectus under the caption
"Use of Proceeds") and compliance by the Company with its obligations
hereunder have been duly authorized by all necessary corporate action and
do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company pursuant to, the Agreements and Instruments
(except for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not result in a Material Adverse Effect), nor will
such action result in any violation of the provisions of the charter or
bylaws of the Company or any applicable law, statute, rule, regulation,
judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any of its assets, properties or operations. As used herein, a
"Repayment Event" means any event or condition which gives the holder of
any note, debenture or other evidence of indebtedness (or any person acting
on such holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company.
(xi) Absence of Labor Dispute. No labor dispute with the employees
------------------------
of the Company exists or, to the knowledge of the Company, is imminent, and
the Company is not aware of any existing or imminent labor disturbance by
the employees of any of its principal suppliers, manufacturers, customers
or contractors, which, in either case, may reasonably be expected to result
in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit,
----------------------
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company,
which is required to be disclosed in the Registration Statement (other than
as disclosed therein), or which might reasonably be expected to result in a
Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets thereof or the
consummation of the transactions contemplated in this Agreement or the
performance by the Company of its obligations hereunder; the aggregate of
all pending legal or governmental proceedings to which the Company is a
party or of which any of its property or assets is the subject which are
not described in the Registration Statement, including ordinary routine
litigation incidental to the business, could not reasonably be expected to
result in a Material Adverse Effect.
5
<PAGE>
(xiii) Accuracy of Exhibits. There are no contracts or documents
--------------------
which are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) Possession of Intellectual Property. The Company owns or
-----------------------------------
possesses, or can acquire on reasonable terms, adequate patents, patent
rights, licenses, inventions, copyrights, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks, trade names
or other intellectual property (collectively, "Intellectual Property")
necessary to carry on the business now operated by the Company, and the
Company has not received any notice nor is otherwise aware of any
infringement of or conflict with asserted rights of others with respect to
any Intellectual Property or of any facts or circumstances which would
render any Intellectual Property invalid or inadequate to protect the
interest of the Company therein, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding) or invalidity or
inadequacy, singly or in the aggregate, would result in a Material Adverse
Effect.
(xv) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except (i) such as have been already
obtained or as may be required under the Securities Act or the Securities
Act Regulations or state securities laws and (ii) such as have been
obtained under the laws and regulations of jurisdictions outside the United
States in which the Reserved Securities are offered.
(xvi) Possession of Licenses and Permits. The Company possesses
----------------------------------
such permits, licenses, approvals, consents and other authorizations
(collectively, "Governmental Licenses") issued by the appropriate federal,
state, local or foreign regulatory agencies or bodies necessary to conduct
the business now operated by the Company; the Company is in compliance with
the terms and conditions of all such Governmental Licenses, except where
the failure so to comply would not, singly or in the aggregate, have a
Material Adverse Effect; all of the Governmental Licenses are valid and in
full force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full force
and effect would not have a Material Adverse Effect; and the Company has
not received any notice of proceedings relating to the revocation or
modification of any such Governmental Licenses which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a Material Adverse Effect.
(xvii) Title to Property. The Company has good and marketable
-----------------
title to all real property owned by the Company and good title to all other
properties owned by the Company, in each case, free and clear of all
mortgages, pledges, liens, security interests, claims, restrictions or
encumbrances of any kind except such as (a) are described in the Prospectus
or (b) do not, singly or in the aggregate, materially adversely affect the
value of such property as currently used or intended to be used and do not
interfere with the use
6
<PAGE>
made and proposed to be made of such property by the Company; and all of
the leases and subleases material to the business of the Company, and under
which the Company holds properties described in the Prospectus, are in full
force and effect, and the Company does not have any notice of any material
claim of any sort that has been asserted by anyone adverse to the rights of
the Company under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company to the continued
possession of the leased or subleased premises under any such lease or
sublease.
(xviii) Investment Company Act. The Company is not, and upon the
----------------------
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xix) Environmental Laws. Except as described in the Registration
------------------
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) the Company is not in violation of any
federal, state, local or foreign statute, law, rule, regulation, ordinance,
code, policy or rule of common law or any judicial or administrative
interpretation thereof, including any judicial or administrative order,
consent, decree or judgment, relating to pollution or protection of human
health, the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or wildlife,
including, without limitation, laws and regulations relating to the release
or threatened release of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials (collectively, "Environmental Laws"), (B) the Company
has all permits, authorizations and approvals required under any applicable
Environmental Laws and is in compliance with their requirements, (C) there
are no pending or, to the best of the Company's knowledge, threatened,
administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against the
Company and (D) to the best of the Company's knowledge, there are no events
or circumstances that might reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the
Company relating to Hazardous Materials or any Environmental Laws.
(xx) Registration Rights. Except as disclosed in the Prospectus,
-------------------
there are no persons with registration rights or other similar rights to
have any securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the Securities Act.
(xxi) Tax Matters. The Company has filed all federal, state, local
-----------
and foreign income tax returns which have been required by law to be filed
and has paid all taxes indicated by said returns and all assessments
received by them to the extent that such
7
<PAGE>
taxes have become due. All tax liabilities have been adequately provided
for in the financial statements of the Company.
(xxii) Internal Accounting Controls. The Company maintains a
----------------------------
system of internal accounting controls sufficient to provide reasonable
assurances that (A) transactions are executed in accordance with
management's general or specific authorization, (B) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets, (C) access to assets is permitted only in
accordance with management's general or specific authorization, and (D) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences to the extent necessary under GAAP.
(xxiii) Adequacy of Insurance. The Company is covered by, or is
---------------------
entitled to the benefits of, insurance in such amounts and of the types
generally deemed adequate for the conduct of its business and the value of
its properties and as is consistent with insurance maintained by companies
engaged in similar businesses.
(xxiv) ERISA Compliance. The Company is to the best of its
----------------
knowledge, in compliance in all material respects with all presently
applicable provisions of the Employee Retirement Income Security Act of
1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"). The Company does not have and has never had any
"defined benefit plan" as defined under ERISA.
(xxv) Year 2000 Issues. The Company has reviewed its operations
----------------
and any third parties with which the Company has a material relationship to
evaluate the extent to which the business or operations of the Company will
be affected by Year 2000 issues. As a result of such review, the Company
represents and warrants that the disclosure in the Registration Statement
relating to Year 2000 issues is accurate and complies in all material
respects with the rules and regulations under the Securities Act. "Year
2000 issues" as used herein means Year 2000 Issues described in or
contemplated by the Commission's Interpretation: Disclosure of the Year
2000 Issues and Consequences by Public Companies, Investment Advisers,
Investment Companies, and Municipal Securities Issuers (Release No. 33-
7558).
(xxvi) Tax-Free Status of Spin-off. The Company's sale of the
---------------------------
Securities should not affect the tax-free status of the spin-off of the
Company's Common Stock effected by Creative on June 7, 1999.
(b) Officer's Certificates. Any certificate signed by any officer of
the Company delivered to the Representatives or to counsel for the Underwriters
shall be deemed a representation and warranty by the Company to each Underwriter
as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing
------------------------------------------
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, severally and not
jointly, and each Underwriter, severally and not jointly, agrees to
8
<PAGE>
purchase from the Company, at the price per share set forth in Schedule B, the
number of Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase up to an additional 300,000
shares of Common Stock at the price per share set forth in Schedule B, less an
----------
amount per share equal to any dividends or distributions declared by the Company
and payable on the Initial Securities but not payable on the Option Securities.
The option hereby granted will expire 30 days after the date hereof and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial Securities upon notice by the Representatives to the
Company setting forth the number of Option Securities as to which the several
Underwriters are then exercising the option and the time and date of payment and
delivery for such Option Securities. Any such time and date of delivery (a
"Date of Delivery") shall be determined by the Representatives, but shall not be
later than seven full business days after the exercise of said option, nor in
any event prior to the Closing Time, as hereinafter defined. If the option is
exercised as to all or any portion of the Option Securities, each of the
Underwriters, acting severally and not jointly, will purchase that proportion of
the total number of Option Securities then being purchased which the number of
Initial Securities set forth in Schedule A opposite the name of such Underwriter
----------
bears to the total number of Initial Securities, subject in each case to such
adjustments as the Representatives in their discretion shall make to eliminate
any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery
of certificates for, the Initial Securities shall be made at the offices of
Morrison & Foerster llp, 19900 MacArthur Boulevard, Suite 1200, Irvine,
California 92612, or at such other place as shall be agreed upon by the
Representatives and the Company, at 7:00 A.M. (Pacific time) on the third
(fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day)
business day after the date hereof (unless postponed in accordance with the
provisions of Section 10), or such other time not later than ten business days
after such date as shall be agreed upon by the Representatives and the Company
(such time and date of payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company, on each Date of Delivery as specified in the notice from the
Representatives to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Representatives for the respective accounts of the Underwriters of
certificates for the Securities to be purchased by them. It is understood that
each Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Initial Securities or the Option Securities, if any, to be
purchased by
9
<PAGE>
any Underwriter whose funds have not been received by the Closing Time or the
relevant Date of Delivery, as the case may be, but such payment shall not
relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations and
registered in such names as the Representatives may request in writing at least
one full business day before the Closing Time or the relevant Date of Delivery,
as the case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with each
------------------------
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Representatives immediately, and
confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect the
filings necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted for
filing under Rule 424(b) was received for filing by the Commission and, in the
event that it was not, it will promptly file such prospectus. The Company will
make every reasonable effort to prevent the issuance of any stop order and, if
any stop order is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) Filing of Amendments. The Company will give the
Representatives notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term Sheet
or any amendment, supplement or revision to either the prospectus included in
the Registration Statement at the time it became effective or to the Prospectus,
will furnish the Representatives with copies of any such documents a reasonable
amount of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Representatives or counsel
for the Underwriters shall reasonably object.
(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the Representatives and counsel for the
Underwriters, without charge, signed copies of the Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the
Representatives, without charge, a conformed copy of the Registration Statement
as originally filed and of each amendment thereto (without exhibits) for each of
the Underwriters. The copies of the Registration Statement and each amendment
thereto furnished to the Underwriters will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
10
<PAGE>
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the Securities Act. The Company
will furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the Securities Act or the
Securities Exchange Act of 1934 (the "Exchange Act"), such number of copies of
the Prospectus (as amended or supplemented) as such Underwriter may reasonably
request. The Prospectus and any amendments or supplements thereto furnished to
the Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will
comply with the Securities Act and the Securities Act Regulations so as to
permit the completion of the distribution of the Securities as contemplated in
this Agreement and in the Prospectus. If at any time when a prospectus is
required by the Securities Act to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result of which
it is necessary, in the opinion of counsel for the Underwriters or for the
Company, to amend the Registration Statement or amend or supplement the
Prospectus in order that the Prospectus will not include any untrue statements
of a material fact or omit to state a material fact necessary in order to make
the statements therein not misleading in the light of the circumstances existing
at the time it is delivered to a purchaser, or if it shall be necessary, in the
opinion of such counsel, at any such time to amend the Registration Statement or
amend or supplement the Prospectus in order to comply with the requirements of
the Securities Act or the Securities Act Regulations, the Company will promptly
prepare and file with the Commission, subject to Section 3(b), such amendment or
supplement as may be necessary to correct such statement or omission or to make
the Registration Statement or the Prospectus comply with such requirements, and
the Company will furnish to the Underwriters such number of copies of such
amendment or supplement as the Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best
efforts, in cooperation with the Underwriters, to qualify the Securities for
offering and sale under the applicable securities laws of such states and other
jurisdictions (domestic or foreign) as the Representatives may designate and to
maintain such qualifications in effect for a period of not less than one year
from the later of the effective date of the Registration Statement and any Rule
462(b) Registration Statement; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the Company will
file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than one year from the effective date of the Registration Statement and any Rule
462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports
pursuant to the Exchange Act as are necessary in order to make generally
available to its securityholders as soon as practicable an earnings statement
for the purposes of, and to provide the benefits contemplated by, the last
paragraph of Section 11(a) of the Securities Act.
(h) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified in the
Prospectus under "Use of Proceeds".
11
<PAGE>
(i) Listing. The Company will use its best efforts to effect
and maintain the quotation of the Securities on the Nasdaq National Market and
will file with the Nasdaq National Market all documents and notices required by
the Nasdaq National Market of companies that have securities that are traded in
the over-the-counter market and quotations for which are reported by the Nasdaq
National Market.
(j) Restriction on Sale of Securities. During a period of 90 days
from the date of the Prospectus, the Company will not, without the prior written
consent of Merrill Lynch, (i) directly or indirectly, 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 any 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 any registration statement under the Securities
Act with respect to any of the foregoing or (ii) enter into any swap or any
other agreement or any transaction that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Securities to be
sold hereunder, (B) any shares of Common Stock issued by the Company upon the
exercise of an option or warrant or the conversion of a security outstanding on
the date hereof and referred to in the Prospectus, (C) any shares of Common
Stock issued or options to purchase Common Stock granted by the Company pursuant
to existing employee benefit plans of the Company referred to in the Prospectus
or (D) any shares of Common Stock issued by the Company pursuant to any non-
employee director stock plan or dividend reinvestment plan.
(k) Reporting Requirements. The Company, during the period when
the Prospectus is required to be delivered under the Securities Act or the
Exchange Act, will file all documents required to be filed with the Commission
pursuant to the Exchange Act within the time periods required by the Exchange
Act and the rules and regulations of the Commission thereunder.
SECTION 4. Payment of Expenses
-------------------
(a) Expenses. The Company will pay all expenses incident to
the performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery
of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters, (iv) the fees and
disbursements of the Company's counsel, accountants and other advisors, (v) the
qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectus and any amendments
or supplements thereto, (vii) the preparation, printing and delivery to the
Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii)
the fees and expenses of any transfer agent or registrar for the Securities,
(ix) the filing fees incident to, and the reasonable fees and disbursements of
12
<PAGE>
counsel to the Underwriters in connection with, the review by the NASD of the
terms of the sale of the Securities and (x) the fees and expenses incurred in
connection with the inclusion of the Securities in the Nasdaq National Market.
(b) Termination of Agreement. If this Agreement is terminated by
the Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
reasonable out-of-pocket expenses, including the reasonable fees and
disbursements of counsel for the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations. The obligations of
---------------------------------------
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company delivered pursuant to the
provisions hereof, to the performance by the Company of its covenants and other
obligations hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the Securities Act or
proceedings therefor initiated or threatened by the Commission, and any request
on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of counsel to the Underwriters. A
prospectus containing the Rule 430A Information shall have been filed with the
Commission in accordance with Rule 424(b) (or a post-effective amendment
providing such information shall have been filed and declared effective in
accordance with the requirements of Rule 430A) or, if the Company has elected to
rely upon Rule 434, a Term Sheet shall have been filed with the Commission in
accordance with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time, the
Representatives shall have received the opinion, dated as of Closing Time, of
Morrison & Foerster llp, counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, together with signed or reproduced
copies of such letter for each of the other Underwriters to the effect set forth
in Exhibit A hereto and to such further effect as counsel to the Underwriters
---------
may reasonably request.
(c) Opinion of PricewaterhouseCoopers LLP. At the time of the
execution of this Agreement and at Closing Time, the Company shall have received
the favorable opinion, dated as of Closing Time, of PricewaterhouseCoopers LLP,
in form and substance satisfactory to counsel for the Company and the
Underwriters, to the effect that, among other things, the Company's sale of the
Securities should not result in the application of Section 355(e) of the Code
with respect to the spin-off of the Company's Common Stock effected by Creative
on June 7, 1999, and to such further effect as counsel to the Company and the
Underwriters may reasonably request, and the Underwriters will be entitled to
rely on such opinion as if it was addressed to them and dated as of the Closing
Time.
(d) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Latham & Watkins, counsel for the Underwriters, together with signed or
reproduced copies of such letter for each of the other Underwriters with respect
to the matters set forth in clauses (i), (ii), (v), (vi) (solely as to
preemptive or other similar rights arising by operation of law or under the
charter or bylaws of the Company), (viii), (ix), (xiv) (solely as to the
information in the Prospectus under "Description of Capital Stock--Common
Stock") and the penultimate paragraph of Exhibit A hereto. In giving such
---------
opinion such counsel may rely, as to all matters governed by the laws of
jurisdictions other than the federal law of the United
13
<PAGE>
States and the General Corporation Law of the State of Delaware, upon the
opinions of counsel satisfactory to the Representatives. Such counsel may also
state that, insofar as such opinion involves factual matters, they have relied,
to the extent they deem proper, upon certificates of officers of the Company and
its subsidiaries and certificates of public officials.
(e) Officers' Certificate. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company, whether or not arising in the ordinary course
of business, and the Representatives shall have received a certificate of the
President or a Vice President of the Company and of the chief financial or chief
accounting officer of the Company, dated as of Closing Time, to the effect that
(i) there has been no such material adverse change, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same force and
effect as though expressly made at and as of Closing Time, (iii) the Company has
complied with all agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to Closing Time, and (iv) no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are pending or are
contemplated by the Commission.
(f) Accountants' Comfort Letter. At the time of the execution of
this Agreement, the Representatives shall have received from Ernst & Young LLP a
letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of such letter for
each of the other Underwriters containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters, delivered
according to Statement of Auditing Standards Nos. 72 and 76 (or any successor
bulletins), with respect to the audited and unaudited financial statements and
certain financial information contained in the Registration Statement and the
Prospectus.
(g) Bring-down Comfort Letter. At Closing Time, the
Representatives shall have received from Ernst & Young LLP a letter, dated as of
Closing Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (f) of this Section, except that the "specified
date" referred to shall be a date not more than three business days prior to
Closing Time.
(h) Approval of Listing. At Closing Time, the Securities shall
have been approved for inclusion in the Nasdaq National Market, subject only to
official notice of issuance.
(i) No Objection. The NASD shall have confirmed that it has not
raised any objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(j) Lock-up Agreements. At the date of this Agreement, the
Representatives shall have received agreements substantially in the form of
Exhibit B hereto signed by each of the persons listed on Schedule C hereto. In
- --------- ----------
addition, at the date of this Agreement, the Representatives shall have received
agreements substantially in the form of Exhibit C hereto signed by each of
---------
Messrs. Frank F. Khulusi and Sam U. Khulusi.
(k) Conditions to Purchase of Option Securities . In the event
that the Underwriters exercise their option provided in Section 2(b) hereof to
purchase all or any portion of the Option Securities, the representations and
warranties of the Company contained herein and the statements in any
certificates furnished by the Company or any subsidiary of the Company hereunder
shall be true and correct as of each Date of Delivery and, at the relevant Date
of Delivery, the Representatives shall have received:
14
<PAGE>
(i) Officers' Certificate. A certificate, dated such Date of
---------------------
Delivery, of the President or a Vice President of the Company and of the
chief financial or chief accounting officer of the Company confirming that
the certificate delivered at the Closing Time pursuant to Section 5(e)
hereof remains true and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion of
------------------------------
Morrison & Foerster llp, counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, dated such Date of Delivery,
relating to the Option Securities to be purchased on such Date of Delivery
and otherwise to the same effect as the opinion required by Section 5(b)
hereof.
(iii) Opinion of Counsel for Underwriters. The favorable opinion of
-----------------------------------
Latham & Watkins, counsel for the Underwriters, dated such Date of
Delivery, relating to the Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion required by
Section 5(d) hereof.
(iv) Bring-down Comfort Letter. A letter from Ernst & Young LLP, in
-------------------------
form and substance satisfactory to the Representatives and dated such Date
of Delivery, substantially in the same form and substance as the letter
furnished to the Representatives pursuant to Section 5(g) hereof, except
that the "specified date" in the letter furnished pursuant to this
paragraph shall be a date not more than five days prior to such Date of
Delivery.
(l) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the Underwriters shall have been furnished with such
documents and opinions as they may reasonably require for the purpose of
enabling them to pass upon the issuance and sale of the Securities as herein
contemplated, or in order to evidence the accuracy of any of the representations
or warranties, or the fulfillment of any of the conditions, herein contained;
and all proceedings taken by the Company in connection with the issuance and
sale of the Securities as herein contemplated shall be satisfactory in form and
substance to the Representatives and counsel for the Underwriters.
(m) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option
Securities, on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representatives by notice to the Company at
any time at or prior to Closing Time or such Date of Delivery, as the case may
be, and such termination shall be without liability of any party to any other
party except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification
---------------
(a) Indemnification of Underwriters . The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material
15
<PAGE>
fact contained in the Registration Statement (or any amendment thereto),
including the Rule 430A Information and the Rule 434 Information, if
applicable, or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements
therein not misleading or arising out of any untrue statement or alleged
untrue statement of a material fact included in any preliminary prospectus
or the Prospectus (or any amendment or supplement thereto), or the omission
or alleged omission therefrom of a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, alleged untrue
statement or omission; provided that (subject to Section 6(d) below) any
such settlement is effected with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto); and provided further that
the Company will not be liable to an Underwriter with respect to any preliminary
prospectus to the extent that the Company shall sustain the burden of proving
that any such loss, liability, claim, damage or expense resulted from the fact
that such Underwriter, in contravention of a requirement of this Agreement or
applicable law, sold Securities to a person to whom such Underwriter failed to
send or give, at or prior to the Closing Time, a copy of the final Prospectus,
as then amended or supplemented if: (i) the Company has previously furnished
copies thereof (sufficiently in advance of the Closing Time and in sufficient
quantity to allow for distribution by the Closing Time) to the Underwriters and
the loss, liability, claim, damage or expense of such Underwriter resulted from
an untrue statement or omission of a material fact contained in or omitted from
the preliminary prospectus which was corrected in the Prospectus as, if
applicable, amended or supplemented prior to the Closing Time and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person and (ii) such failure to give or send such
Prospectus by the Closing Time to the party or parties asserting such loss,
liability, claim, damage or expense would have constituted a valid defense to
the claim asserted by such person.
(b) Indemnification of Company, Directors and Officers . Each
Underwriter severally agrees to indemnify and hold harmless the Company and
directors, each of the officers of the Company who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act against
any and all loss,
16
<PAGE>
liability, claim, damage and expense described in the indemnity contained in
subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such Underwriter through Merrill Lynch expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it is
not materially prejudiced as a result thereof and in any event shall not relieve
it from any liability which it may have otherwise than on account of this
indemnity agreement. In the case of parties indemnified pursuant to Section
6(a) above, counsel to the indemnified parties shall be selected by Merrill
Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above,
counsel to the indemnified parties shall be selected by the Company. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse . If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
17
<PAGE>
SECTION 7. Contribution. If the indemnification provided for in
------------
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company, on the one hand, and the Underwriters, on the other hand, from the
offering of the Securities pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company, on the one hand, and of
the Underwriters, on the other hand, in connection with the statements or
omissions, which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company, on the one hand, and the
Underwriters, on the other hand, in connection with the offering of the
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the Underwriters, in
each case as set forth on the cover of the Prospectus, or, if Rule 434 is used,
the corresponding location on the Term Sheet, bear to the aggregate initial
public offering price of the Securities as set forth on such cover.
The relative fault of the Company, on the one hand, and the Underwriters,
on the other hand, shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such
18
<PAGE>
fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act shall have the same rights to contribution as such
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act shall have the same rights to contribution as the Company. The
Underwriters' respective obligations to contribute pursuant to this Section 7
are several in proportion to the number of Initial Securities set forth opposite
their respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any Underwriter or controlling person, or by or on behalf of the
Company, and shall survive delivery of the Securities to the Underwriters.
SECTION 9. Termination of Agreement.
------------------------
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Representatives, impracticable to market the Securities or to
enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the Nasdaq National Market, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or materially limited, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices have been required, by
any of said exchanges or by such system or by order of the Commission, the NASD
or any other governmental authority, or (iv) if a banking moratorium has been
declared by either Federal or New York authorities.
(b) Liabilities.
If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8
shall survive such termination and remain in full force and effect.
SECTION 10. Default by One or More of the Underwriters. If one or more of
------------------------------------------
the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less
19
<PAGE>
than all, of the Defaulted Securities in such amounts as may be agreed upon and
upon the terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the number
of Securities to be purchased on such date, each of the non-defaulting
Underwriters shall be obligated, severally and not jointly, to purchase the full
amount thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
Securities to be purchased on such date, this Agreement or, with respect to any
Date of Delivery which occurs after the Closing Time, the obligation of the
Underwriters to purchase and of the Company to sell the Option Securities to be
purchased and sold on such Date of Delivery, shall terminate without liability
on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the Representatives or the Company shall have the
right to postpone Closing Time or the relevant Date of Delivery, as the case may
be, for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 10.
SECTION 11. Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at 3300 Hillview Avenue,
Suite 150, Palo Alto, California 94304, attention of Mathew Pendo, Managing
Director (with a copy, which shall not constitute notice, to Latham & Watkins,
505 Montgomery Street, Suite 1900, San Francisco, California 94111, attention of
Gregory K. Miller); and notices to the Company shall be directed to it at 2525
Busse Road, Elk Grove Village, Illinois 60007, attention of Gregory K. Jones
(with a copy, which shall not constitute notice, to Morrison & Foerster llp,
19900 MacArthur Boulevard, Suite 1200, Irvine, California 92612, attention of
Robert M. Mattson, Jr.).
SECTION 12. Parties. This Agreement shall each inure to the benefit
-------
of and be binding upon the Underwriters, the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters, the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters, the Company and their respective
successors, and said controlling persons and officers and directors and their
heirs
20
<PAGE>
and legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Securities from any Underwriter shall be deemed to
be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME THIS AGREEMENT SHALL BE GOVERNED BY AND
----------------------
SECTION 14. Effect of Headings. The Article and Section headings herein
------------------
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
SECTION 15. Miscellaneous. This Agreement may be executed in two or more
-------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
21
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement among
the Underwriters and the Company in accordance with its terms.
Very truly yours,
uBID, INC.
By
------------------------
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
BANC OF AMERICA SECURITIES LLC
WILLIAM BLAIR & COMPANY, L.L.C.
WIT CAPITAL CORPORATION
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By /s/
-------------------------------------
Authorized Signature
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
- ----------
22
<PAGE>
SCHEDULE A
Number of
Initial
Name of Underwriter Securities
- ---------------------------------------------------------- -------------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................
Banc of America Securities LLC...........................
William Blair & Company, L.L.C...........................
Wit Capital Corporation..................................
Total................................................... 2,000,000
===================
23
<PAGE>
SCHEDULE B
uBID, INC.
2,000,000 Shares of Common Stock
(Par Value $.001 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $___.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $____, being an amount equal to the initial
public offering price set forth above less $_____ per share; provided that
the purchase price per share for any Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be
reduced by an amount per share equal to any dividends or distributions
declared by the Company and payable on the Initial Securities but not
payable on the Option Securities.
24
<PAGE>
SCHEDULE C
List of certain persons
subject to lock-up
Gregory K. Jones
Thomas E. Werner
Timothy E. Takesue
Joel D. Ludvigsen
D. Paul Stolarski
Jason M. MacLean
Allen U. Lenzmeier
Howard A. Tullman
Norman H. Wesley
Mark C. Layton
25
<PAGE>
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which the
conduct of its business requires such qualification, except for any such
jurisdiction where the failure so to qualify or to be in good standing
would not result in a Material Adverse Effect.
(iv) The Company has an authorized capitalization as of the date
hereof as set forth in the Prospectus under the caption "Description of
Capital Stock--Authorized Capital Stock", and the shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable.
(v) The Securities have been duly authorized for issuance and sale to
the Underwriters pursuant to the Purchase Agreement and, when issued and
delivered by the Company pursuant to the Purchase Agreement against payment
of the consideration set forth in the Purchase Agreement, will be validly
issued and fully paid and non-assessable.
(vi) The issuance of the Securities is not subject to preemptive or
other similar rights of any securityholder of the Company arising by
operation of law, the charter or bylaws of the Company or, to our
knowledge, otherwise.
(vii) To our knowledge, the Company does not have any subsidiaries.
(viii) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the Securities
Act; any required filing of the Prospectus pursuant to Rule 424(b) has been
made in the manner and within the time period required by Rule 424(b); and,
to our knowledge, no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement has been
issued under the Securities Act and no proceedings for that purpose have
been instituted or are pending or threatened by the Commission.
(x) At the time the Registration Statement became effective, the
Registration Statement, including any Rule 462(b) Registration Statement,
the Rule 430A Information and the Rule 434 Information, as applicable, the
Prospectus and each amendment or supplement to the Registration Statement
and Prospectus as of their respective effective or
26
<PAGE>
issue dates (other than the financial statements and supporting schedules
included therein or omitted therefrom, as to which we need express no
opinion) complied as to form in all material respects with the requirements
of the Securities Act and the Securities Act Regulations.
(xi) If Rule 434 has been relied upon, the Prospectus was not
"materially different", as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time it became
effective.
(xii) The form of certificate used to evidence the Securities
complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the charter and bylaws of
the Company and the requirements of the Nasdaq National Market.
(xiii) To our knowledge, there is not pending or threatened any
action, suit, proceeding, inquiry or investigation, to which the Company is
a party, or to which the property of the Company is subject, before or
brought by any court or governmental agency or body, domestic or foreign,
which might reasonably be expected to result in a Material Adverse Effect,
or which might reasonably be expected to materially and adversely affect
the properties or assets thereof or the consummation of the transactions
contemplated in the Purchase Agreement or the performance by the Company of
its obligations thereunder.
(xiv) The information in the Prospectus under "Business--Intellectual
Property and Other Proprietary Rights", "Business--Facilities", "Certain
Transactions", and "Description of Capital Stock", and in the Registration
Statement under Item 14, to the extent that it constitutes matters of law,
summaries of legal matters, the Company's charter and bylaws or legal
proceedings, or legal conclusions, has been reviewed by us and is correct
in all material respects.
(xv) To our knowledge, there are no franchises, contracts, indentures,
mortgages, loan agreements, notes, leases or other instruments required to
be described or referred to in the Registration Statement or to be filed as
exhibits thereto other than those described or referred to therein or filed
or incorporated by reference as exhibits thereto, and, to our knowledge,
the descriptions thereof or references thereto are correct in all material
respects.
(xvi) No authorization, approval, consent or order of any court or
governmental authority or agency, domestic or foreign (other than under the
Securities Act and the Securities Act Regulations, which have been
obtained, or as may be required under the securities or blue sky laws of
the various states, as to which we need express no opinion) is necessary or
required in connection with the offering, issuance or sale of the
Securities.
(xvii) The execution, delivery and performance of the Purchase
Agreement and the consummation of the issuance and sale of the Securities
as contemplated in the Purchase Agreement and in the Registration Statement
and compliance by the Company with its obligations under the Purchase
Agreement do not and will not conflict with or constitute a breach of, or
default or Repayment Event (as defined in Section 1(a)(x) of the Purchase
Agreement) under or result in the creation or imposition of any lien,
charge or
27
<PAGE>
encumbrance upon any property or assets of the Company pursuant to any
contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or any other agreement or instrument, known to us, to which the
Company is a party or by which it may be bound, or to which any of the
property or assets of the Company is subject (except for such conflicts,
breaches or defaults or liens, charges or encumbrances that would not have
a Material Adverse Effect), nor will such action result in any violation of
the provisions of the charter or bylaws of the Company, or any applicable
law, statute, rule, regulation, judgment, order, writ or decree, known to
us, of any government, government instrumentality or court, domestic or
foreign, to which the Company is a party.
(xviii) Except as disclosed in the Prospectus, to our knowledge,
there are no persons with registration rights or other similar rights to
have any securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the Securities Act.
(xix) The Company is not an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in the
1940 Act.
Based upon and subject to the foregoing, nothing has come to our
attention that leads us to believe that the Registration Statement or any
amendment thereto, including the Rule 430A Information and Rule 434
Information (if applicable), (except for financial statements and schedules
and other financial or statistical data included therein or omitted
therefrom, as to which we need make no statement), at the time such
Registration Statement or any amendment thereto became effective, contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus or any amendment or supplement
thereto (except for financial statements and schedules and other financial
or statistical data included therein or omitted therefrom, as to which we
need make no statement), at the time the Prospectus was issued, at any time
any such amended or supplemented prospectus was issued or at the Closing
Time, contained an untrue statement of a material fact or omitted or omits
to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials.
Such opinion shall not state that it is to be governed or qualified by, or
that it is otherwise subject to, any treatise, written policy or other
document relating to legal opinions, including, without limitation, the
Legal Opinion Accord of the ABA Section of Business Law (1991).
28
<PAGE>
[Form of lock-up from directors, officers or other
stockholders pursuant to Section 5(j)]
Exhibit B
______________, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
BANC OF AMERICA SECURITIES LLC
WILLIAM BLAIR & COMPANY, L.L.C.
WIT CAPITAL CORPORATION
as Representatives of the several Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower, World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by uBid, Inc.
--------------------------------------
Ladies and Gentlemen:
The undersigned, a stockholder, director and/or officer of uBid, Inc.,
a Delaware corporation (the "Company"), understands that Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Banc of
America Securities LLC, William Blair & Company, L.L.C. and Wit Capital
Corporation as representatives of certain other underwriters propose to enter
into a Purchase Agreement (the "Purchase Agreement") with the Company providing
for the public offering of shares (the "Securities") of the Company's common
stock, par value $.001 per share (the "Common Stock"). In recognition of the
benefit that such an offering will confer upon the undersigned as a stockholder,
director and/or officer of the Company, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
undersigned agrees with each underwriter to be named in the Purchase Agreement
that, during a period of 90 days from the date of the Purchase Agreement, the
undersigned will not, without the prior written consent of Merrill Lynch,
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 the Company's Common Stock or any securities convertible
into or exchangeable or exercisable for Common Stock, whether now owned or
hereafter acquired by the undersigned or with respect to which the undersigned
has or hereafter acquires the power of disposition, or file any registration
statement under the Securities Act of 1933, as amended, with respect to any of
the foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock, whether any such swap
transaction is to be settled by delivery of Common Stock or other securities, in
cash or otherwise.
Very truly yours,
Signature:
---------------------------
Print Name:
--------------------------
29
<PAGE>
[Form of lock-up from Messrs. Frank F. Khulusi and
Sam U. Khulusi pursuant to Section 5(j)]
Exhibit C
___________, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
BANC OF AMERICA SECURITIES LLC
WILLIAM BLAIR & COMPANY, L.L.C.
as Representatives of the several Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower, World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by uBid, Inc.
--------------------------------------
Ladies and Gentlemen:
The undersigned, a stockholder of uBid, Inc., a Delaware corporation
(the "Company"), understands that Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), Banc of America Securities LLC,
William Blair & Company, L.L.C. and Wit Capital Corporation as representatives
of certain other underwriters propose to enter into a Purchase Agreement (the
"Purchase Agreement") with the Company providing for the public offering of
shares (the "Securities") of the Company's common stock, par value $.001 per
share (the "Common Stock"). In recognition of the benefit that such an offering
will confer upon the undersigned as a stockholder of the Company, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the undersigned agrees with each underwriter to be named in the
Purchase Agreement that, during a period of 90 days from the date of the
Purchase Agreement, the undersigned will not, without the prior written consent
of Merrill Lynch, 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 the Company's Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of disposition, or
file any registration statement under the Securities Act of 1933, as amended,
with respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap transaction is to be settled by delivery of Common Stock or other
securities, in cash or otherwise.
In addition, the undersigned agrees with each underwriter to be named
in the Purchase Agreement, for a period of 90 days, 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.
Very truly yours,
Signature:
----------------------------
Print Name:
----------------------------
30
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF MORRISON & FOERSTER LLP APPEARS HERE]
August 30, 1999
uBid, Inc.
2525 Busse Road
Elk Grove Village, Illinois 60007
Re: Registration Statement on Form S-1
No. 333-83319
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1 of
uBid, Inc., a Delaware corporation (the "Company"), filed with the Securities
and Exchange Commission on July 21, 1999, and all amendments thereto
(collectively, the "Registration Statement"), relating to the registration under
the Securities Act of 1933, as amended, of up to 2,300,000 shares (the "Stock")
of the Company's common stock, $.001 par value (including up to 300,000 shares
subject to the underwriters' over-allotment option). The Stock is to be sold to
the underwriters named in the Registration Statement for resale to the public.
As counsel to the Company, we have examined the proceedings taken by the
Company in connection with the issuance and sale by the Company of the Stock.
We are of the opinion that the shares of Stock to be offered and sold by
the Company have been duly authorized and, when issued and sold by the Company
in the manner described in the Registration Statement and in accordance with the
resolutions adopted by the Board of Directors of the Company, will be legally
issued, fully paid and nonassessable.
We hereby consent to the inclusion of this opinion as an exhibit to the
Registration Statement and any amendments thereto and to the reference to our
firm under the caption "Legal Matters" in the prospectus included therein.
Very truly yours,
/s/ Morrison & Foerster LLP
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF PRICEWATERHOUSECOOPERS APPEARS HERE]
Mr. Frank Khulusi
Chief Executive Officer
Creative Computers, Inc.
2555 West 190th Street
Torrance, California 90504
Mr. Gregory Jones
Chief Executive Officer
uBid, Inc.
2525 Busse Road
Oak Grove Village, Illinois 60007
August 31, 1999
Re: Proposed uBid Secondary Offering
-------------------------------------
Effect on Federal Income Tax Consequences of Prior Spin-Off of uBid
-------------------------------------------------------------------
Dear Messrs. Khulusi and Jones:
You have requested our opinion regarding the federal income tax consequences of
the effect of a proposed secondary public offering by uBid, Inc. ("uBid") on the
prior tax-free distribution of the stock of uBid (the "Distribution") by
Creative Computers, Inc. DE ("Holdings"). PricewaterhouseCoopers LLP ("PwC")
issued an opinion on the federal income tax consequences of the Distribution
(the "Opinion").
Background
----------
Holdings is a publicly traded corporation which owns all of the outstanding
stock of Creative Computers Inc. (CA) ("Creative"). Prior to June 7, 1999
Creative owned 7,329,883 shares, representing at least 80 percent of the voting
power and value, of the outstanding stock of uBid. The remaining 1,817,000
shares of uBid were owned by the public as a result of uBid's initial public
offering on December 4, 1998. On June 7, 1999, Creative distributed the stock
of uBid it held to Holdings, and Holdings then distributed the stock of uBid it
held to its
<PAGE>
[LOGO OF PRICEWATERHOUSECOOPERS APPEARS HERE]
shareholders, in transactions intended to qualify for tax-free treatment under
sections 368(a)(1)(D)/1/ and 355. One of the business purposes for the
distribution of the stock of uBid by Creative and Holdings was to facilitate the
uBid public offering which had occurred on December 4, 1998. Following the
Distribution, all of the outstanding uBid stock was held by the public.
On November 17, 1998, SC Fundamental L.P., an investment advisor and previously
a greater than five percent shareholder in Holdings, sold 799,500 of its
Holdings shares on the open market. On January 21, 1999, Amre Youness,
previously a greater than five percent shareholder in Holdings, sold 201,200 of
his Holdings shares on the open market. Neither of these sales was placed to a
single buyer or group of buyers, and each decision to sell was an independent
investment decision of each seller. Each sale was not part of plan or series
of transactions in which one or more persons acquired control of either Holdings
or uBid.
As of August 27, 1999, there were 2,397,223 outstanding options to acquire uBid
stock, of which 528,524 were received by Creative option holders upon the
Distribution. All other uBid stock options were issued to uBid employees in the
ordinary course of business in the form of compensation to such employees. uBid
is currently considering the issuance of 2,300,000 shares of its common stock in
a public offering (the "Secondary Offering").
Issue
-----
You have requested PwC to consider whether the Secondary Offering will adversely
impact the conclusions reached in the Opinion. Specifically, you have asked
whether section 355(e) could apply as a result of the Secondary Offering which
would require Creative to recognize gain on the distribution of uBid stock.
- ---------------------
/1/ All section references are to the Internal Revenue Code of 1986, as amended.
All references to Treas. Reg. are to the Treasury regulations promulgated
thereunder.
(2)
<PAGE>
[LOGO OF PRICEWATERHOUSECOOPERS APPEARS HERE]
Opinion
-------
In rendering our opinion on the federal income tax consequences of the Secondary
Offering on the prior Distribution, we have reviewed all 13D and 13G filings
made with the Securities and Exchange Commission through the date of this
letter. We have also reviewed uBid's Amendment No. 1 to the Form S-1
Registration Statement dated August 31, 1999.
Our opinion is based solely upon the assumptions and representations made and
contained herein being true, correct and complete. In rendering our opinion we
have relied upon such facts, assumptions, and representations referred to herein
without undertaking independently to verify the accuracy and completeness of the
matters covered thereby. In the event any one of the facts, representations or
assumptions is incorrect, the conclusion reached in this opinion might be
adversely affected.
Our opinions represent our best judgment of how a court would rule if presented
with the issues addressed therein and will not be binding upon either the IRS
and/or a U.S. court of competent jurisdiction. The requirements for
nonrecognition under section 355(e) are to a significant extent subjective in
nature, and have an absence of authority addressing their application to the
particular facts presented by the proposed transaction. Assurance cannot be
given that a position taken in reliance on our opinions will not be challenged
by the IRS or rejected by a court. No ruling will be requested from the IRS
regarding the proposed transaction.
It is our opinion, based on the facts, assumptions and representations contained
herein, that the Secondary Offering should not result in the application of
section 355(e) with respect to the Distribution.
Assumptions
-----------
In rendering a tax opinion on the effect of the Secondary Offering on the
Distribution, PwC has made certain assumptions. If any one of these assumptions
is not true, accurate, and complete, our opinions could change. PwC has relied
on the accuracy of these assumptions, and has not attempted to independently
verify any of these assumptions.
1. All representations made in the Opinion were true and accurate as of the
date of the
(3)
<PAGE>
[LOGO OF PRICEWATERHOUSECOOPERS APPEARS HERE]
Distribution, and the management of Holdings, Creative, and uBid are not
aware of any events or conditions occurring subsequent to the Distribution
which would make any of the representations not true and accurate.
2. To the best of the knowledge of the management of Holdings, Creative, and
uBid, each sale of Holdings shares by Amre Youness and SC Fundamental L.P.
was: (a) effected on the open market and completed with unrelated
purchaser(s); (b) not placed to a single buyer or group of buyers; (c) made
pursuant to an independent investment decision of each seller; and (d) not
part of plan or series of transactions in which one or more persons acquired
control of either Holdings or uBid.
3. Shares of uBid issued under the uBid stock option plan are not issued
pursuant to a plan or series of related transactions intended to allow a
person or persons to acquire control of uBid. All stock options issued under
uBid's stock option plan were issued to employees of uBid in the ordinary
course of uBid's business.
4. Except for open market transactions typical of any company with securities
traded on the NASDAQ market, all dispositions of Holdings, Creative, and
uBid shares occurring during the four year period beginning two years prior
to the Distribution have been disclosed to PwC.
Federal Income Tax Consequences
-------------------------------
If there is a distribution of stock to which section 355(e) applies, any stock
or securities in the controlled corporation shall not be treated as qualified
property for purposes of section 355(c)(2) and section 361(c)(2). Section
355(e)(1). Section 355(e) applies to any distribution which is a section 355
distribution, and which is part of a plan (or series of related transactions)
pursuant to which one or more persons acquire directly or indirectly stock
representing a 50-percent or greater interest/2/ in the distributing corporation
or any controlled
- ---------------------
/2/ "50-percent or greater interest" is defined in section 355(d)(4) as at
least 50 percent of the total combined voting power of the corporation, or
at least 50 percent of the value of all shares of all classes of stock of
the corporation.
(4)
<PAGE>
[LOGO OF PRICEWATERHOUSECOOPERS APPEARS HERE]
corporation. Section 355(e)(2)(A). If one or more persons acquire, directly or
indirectly, stock representing a 50 percent or greater interest in the
distributing corporation or any controlled corporation during the four year
period beginning two years prior to the distribution, such acquisition shall be
treated as pursuant to a plan described in section 355(e)(2)(A) unless it is
established that the distribution and the acquisition are not pursuant to a plan
or series of related transactions.
To date, there has been no authoritative guidance from the Internal Revenue
Service regarding the application of section 355(e). Specifically, there has
been no authoritative guidance on what constitutes a "plan or series of related
transactions" for purposes of section 355(e)./3/
The only guidance available on the application of section 355(e) is in the
legislative history and committee reports of the provision. The "Blue Book"/4/
describing section 355(e) states that a public offering of sufficient size can
result in an acquisition that causes gain recognition under section 355(e).
Additionally, whether a corporation is acquired is determined under the rules
similar to those of section 355(d), except that acquisitions are not restricted
to "purchase" transactions.
The Opinion concluded, among other items, that no gain or loss will be
recognized by Creative, Holdings, or the shareholders of Holdings on the
Distribution. This conclusion was based, in part, upon representations that
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
- -------------------------
/3/ On August 19, 1999, Proposed Regulations under section 355(e) were issued
which provide guidance on the application of certain provisions of section
355(e). While these proposed regulations are instructive, they are proposed
to be effective for distributions occurring on or after the date final
regulations are published in the federal register.
/4/ General Explanation of Tax Legislation Enacted in 1997, prepared by the
staff of the Joint Committee on Taxation, December 17, 1997.
(5)
<PAGE>
[LOGO OF PRICEWATERHOUSECOOPERS APPEARS HERE]
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.
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.
It is our assumption that these representations were true and accurate on the
date of the Distribution. The sales of Holdings shares by SC Fundamental L.P.
and Amre Youness, the issuance of options to acquire uBid stock issued to
employees in the ordinary course of uBid's business, and the issuance of uBid
stock options to Holdings option holders in the Distribution, considered
together with the uBid initial public offering and the Secondary Offering,
should not result in the application of section 355(e) to the Distribution.
Caveats and Limitations
-----------------------
This opinion is based upon the information presented and the facts and
assumptions described above. Our opinion does not address any transactions
other than those described above, or any transactions whatsoever, if all the
transactions described therein are not consummated as described without waiver
or breach of any material provision thereof or if the information, assumptions
and representations set forth therein are not true and accurate at all relevant
times. If any of the information, assumptions or representations are incorrect,
the conclusions reached in our opinion might be adversely affected.
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
(6)
<PAGE>
[LOGO OF PRICEWATERHOUSECOOPERS APPEARS HERE]
stated therein. PwC undertakes no responsibility to advise any party or
shareholder of any developments in the application or interpretation of the
federal income tax laws.
The opinion will not address any federal income tax consequences of the
transactions described therein, or transactions related or proximate to the
transactions described therein, except as specifically set forth. Specifically,
the opinion will not address any tax consequences of the Secondary Offering, or
the effect of any transaction involving the stock of Creative, Holdings, or
uBid, other than those specifically named herein.
The opinion does not address any state, local, foreign, or other tax
consequences that may result from any of the transactions described herein, or
transactions related to the transactions described herein.
We will assume that all documents provided to us represent the final form of the
documents or will result in the final form of the documents and will be similar
in all respects to the documents, as executed.
Consent
-------
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
Form S-1 Registration Statement.
* * * * * * * * * * * * * * * *
If you have any questions, please do not hesitate to call Mark Boyer at (202)
414-1629 or Al Remeikis at (202) 414-1602.
Sincerely,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Tax and Legal Services
(7)
<PAGE>
EXHIBIT 10.16
- --------------------------------------------------------------------------------
Confidential treatment has been requested for portions of this exhibit. The
copy filed herewith omits the information subject to the confidentiality
request. Omissions are designated as * * * * *. A complete version of this
exhibit has been filed separately with the Securities and Exchange Commission.
- --------------------------------------------------------------------------------
INTERNATIONAL TOWERS
8550 BRYN MAWR
CHICAGO, ILLINOIS
OFFICE LEASE
BETWEEN
8550 BRYN MAWR, L.L.C.
Landlord,
and
UBID, INC.
Tenant
DATED: July 19,1999
<PAGE>
<TABLE>
<S> <C>
1. Base Rent.................................................... 1
2. Additional Rent.............................................. 2
3. Use of Premises.............................................. 12
4. Prior Occupancy.............................................. 12
5. Services..................................................... 12
6. Condition and Care of Premises............................... 17
7. Return of Premises........................................... 18
8. Holding Over................................................. 19
9. Rules and Regulations........................................ 19
10. Rights Reserved to Landlord.................................. 19
11. Alterations.................................................. 22
12. Assignment and Subletting.................................... 23
13. Waiver of Certain Claims, Indemnity by Tenant................ 26
14. Damage or Destruction by Casualty............................ 27
15. Eminent Domain............................................... 29
16. Default; Landlord's Rights and Remedies...................... 30
17. Subordination................................................ 35
18. Mortgagee Protection......................................... 37
19. Subrogation and Insurance.................................... 37
20. Nonwaiver.................................................... 39
21. Estoppel Certificate......................................... 39
22. Tenant-Corporation........................................... 40
23. Real Estate Brokers.......................................... 40
24. Notices...................................................... 40
</TABLE>
<PAGE>
<TABLE>
<S> <C>
25. Miscellaneous................................................. 41
26. Landlord...................................................... 42
27. Title and Covenant Against Liens.............................. 42
28. Security Deposit.............................................. 43
29. No Recordation................................................ 45
30. Covenant of Quiet Enjoyment................................... 45
31. Limitation of Liability....................................... 45
32. Option to Lease............................................... 45
33. Options to Extend............................................. 48
34. Cancellation Option........................................... 49
35. Roof Antennas................................................. 50
36. Right of Opportunity to Lease Space........................... 52
</TABLE>
<PAGE>
EXHIBITS
Exhibit A - Floor Plan of Premises
Exhibit B - Legal Description of Land
Exhibit C - Workletter
Exhibit D - Rules and Regulations
Exhibit E - Agreement Between Landlord and Lender
<PAGE>
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* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
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INTERNATIONAL TOWERS
8550 BRYN MAWR
CHICAGO, ILLINOIS
OFFICE LEASE
THIS LEASE (this "Lease"), made as of the 19th day of July, 1999,
W I T N E S S E T H:
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8550 BRYN MAWR, L.L.C., a Delaware limited liability company (herein called
"Landlord"), hereby leases to uBid, Inc., a Delaware corporation (herein called
"Tenant"), and Tenant hereby leases from Landlord the premises as outlined on
the floor plan attached hereto as Exhibit A, agreed to contain * * * * *
rentable square feet (herein referred to as the "Premises") consisting of the
second floor of the building commonly known as International Towers, 8550 Bryn
Mawr, Chicago, Illinois (herein called "Building"), located on the Land
(hereinafter defined), for a term (herein called "Term") commencing on the date
when the Premises are substantially complete, as such date may be modified
pursuant to the provisions of Exhibit C (the "Workletter") to and hereby made a
part of this Lease (the "Commencement Date"), and ending on that date which is
three (3) full calendar years following the Commencement Date if the
Commencement Date shall occur on the first (1st) day of a calendar month, or
that date which is the last day of the month in which the third (3rd)
anniversary of the Commencement Date occurs if the Commencement Date shall occur
on a day other than the first (1st) day of a calendar month (such date is
sometimes referred to as the "Expiration Date" of the Term, and such period is
sometimes hereinafter referred to as the "Term"), unless extended or unless
sooner terminated as provided herein, paying as rent therefor the sums
hereinafter provided, without any setoff, abatement (except as herein
specifically provided), counterclaim or deduction whatsoever.
IN CONSIDERATION THEREOF, THE PARTIES HERETO COVENANT AND AGREE:
1. Base Rent. Tenant shall pay an annual base rent (herein called "Base
Rent") to Landlord for the Premises leased pursuant to this Lease for each year
or part thereof falling within the Term at the rates for the respective periods
set forth in the following schedule, payable in equal monthly installments
(herein called "Monthly Base Rent"), in advance, commencing on the Commencement
Date, and on the first day of each calendar month thereafter to the Expiration
Date or earlier termination of the Term, and at the same rate for fractions of a
month if the Commencement Date shall occur on other than the first day of a
calendar month or the Term shall end on any day except the last day of a
calendar month. For purposes of the following schedule the First "Lease Year"
shall be that period commencing with the Commencement Date and ending on the
last day of the twelfth (12th) calendar month following the Commencement Date if
the Commencement Date shall occur on the first (1st) day of a calendar month, or
that date which is the
<PAGE>
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* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
last day of the calendar month in which the first (1st) anniversary of the
Commencement Date occurs if the Commencement Date shall occur on other than the
first (1st) day of a calendar month; and each subsequent "Lease Year" during the
Term shall be the twelve (12) calendar month period starting on the day
following the expiration of the prior Lease Year.
<TABLE>
<CAPTION>
Base Rent Rate Annual Monthly
Lease Year Per Sq. Ft.** Base Rent* Base Rent*
- ---------- ------------- ---------- -----------
<S> <C> <C> <C>
First (1st) $ * * * * * $ * * * * * $ * * * * *
Second (2nd) * * * * * * * * * * * * * * *
Third (3rd) * * * * * * * * * * * * * * *
Fourth (4th) * * * * *
(If Applicable)
</TABLE>
*Based upon the initial Rentable Area of the Premises as of the date of this
Lease (* * * * * rentable square feet).
**The Fourth (4th) Lease Year is the one (1) Lease Year extension period of the
Term described in Section 33 of this Lease, and is only applicable if the
Extension Option shall be exercised and the Fourth (4th) Lease Year shall
commence. The stated Base Rent for the First (1st), Second (2nd) and Third (3rd)
Lease Years is a so-called gross rent, and therefore the provisions of Section 2
of this Lease, Additional Rent, are not applicable to such Lease Years and have
no force or effect respecting such Lease Years. The Base Rent for the Fourth
(4th) Lease Year, if the Extension Option shall be exercised and the Fourth
(4th) Lease Year shall commence will be determined in accordance with the
provisions of Section 33 of this Lease, and will be a so-called net rent, and
therefore the provisions of Section 2 of this Lease, Additional Rent, are fully
applicable to such Fourth (4th) Lease Year.
Base Rent, Additional Rent (as hereinafter defined), Additional Rent
Progress Payment (as hereinafter defined) and all other amounts however
occurring or described becoming due from Tenant to Landlord hereunder (herein
collectively called the "Rent") shall be paid in lawful money of the United
States to Landlord at the office of Landlord, or as otherwise designated from
time to time by written notice from Landlord to Tenant, without any setoff,
abatement (except as herein specifically provided), counterclaim or deduction
whatsoever.
2. Additional Rent. In addition to paying the Base Rent specified in
Section 1 of this Lease, Tenant shall also pay as additional rent for and during
the Fourth (4th) Lease Year, if applicable, the amounts determined in accordance
with this Section 2 ("Additional Rent"):
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(a) Definitions. As used in this Lease,
(i) "Adjustment Date" shall mean January 1, 2003 and each
January 1 thereafter falling within the Term (except as provided in
clause (iv) of subsection (d) hereinafter).
(ii) "Adjustment Year" shall mean each calendar year during which
an Adjustment Date falls.
(iii) "Expenses" shall mean and include those costs and expenses paid or
incurred by or on behalf of the Landlord of every kind and nature for, owning,
managing, operating, maintaining and repairing the Building, the land upon which
the Building stands (herein called "Land;" the legal description of which is set
forth on Exhibit B attached hereto and made a part hereof) and the personal
property used in conjunction therewith (said Building, Land and personalty being
herein collectively called the "Project") at a reasonable standard for first
class office buildings in the Applicable Market Area (hereinafter defined), in
accordance with sound accounting and management principles respecting first-
class office buildings in the Applicable Market Area, including (without
limitation) the cost of: electricity; water; fuel; heating; lighting; plumbing;
air conditioning; window cleaning; janitorial service; insurance, including, but
not limited to, fire, extended coverage, liability, workmen's compensation,
elevator, and any other insurance carried in good faith by the Landlord (and
would be carried in good faith by prudent landlords of similar properties to the
Project) and applicable to the Project; painting; uniforms; management fees;
supplies; sundries; sales or use taxes on supplies or services; cost of wages
and salaries of all persons including and below the level of building manager
(whether or not engaged on a full-time basis at the Project) engaged in the
management, operation, maintenance and repair of the Project, and so-called
fringe benefits, which are required by law or are otherwise reasonable and
customary for similar properties to the Project in the Applicable Market Area
(including, without limitation, social security taxes, unemployment insurance
taxes, cost for providing coverage for disability benefits, cost of any
pensions, hospitalization, welfare or retirement plans, or any other similar or
like expenses incurred under the provisions of any collective bargaining
agreement), or any other cost or expense which is required by law or is
otherwise reasonable and customary for similar properties to the Project in the
Applicable Market Area which Landlord pays or incurs to provide benefits for
employees including and below the level of building manager (whether or not
engaged on a full-time basis at the Project) so engaged in the management,
operation, maintenance and repair of the Project (Appropriate prorations shall
be made of all such wages, salaries and benefits between the Building and other
buildings as to any employees not engaged on a full-time basis in the operation,
maintenance and repair of the Project, such that the costs of such employees
shall be charged as Expenses only in a percentage equal to the percentage of
their time devoted to the operation, maintenance and repair of the Project.);
the charges of any independent contractor who, under contract with the Landlord
or its representatives, does any of the work of managing, operating, maintaining
or repairing of the Project; reasonable legal (incurred in good faith for the
benefit of the Project and as hereinafter further limited) and accounting
expenses, including, but not to be limited to, such expenses as relate to
seeking or obtaining reductions in and refunds of Taxes and as relate to
enforcement of contracts; the cost of providing rubbish and snow removal
services; the cost of landscaping maintenance, including,
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<PAGE>
but not limited to, grass cutting, trimming, replanting and replacement costs;
expenses applicable and chargeable to the Project under any reciprocal easement
or other agreements or declarations (including, without limitation, that certain
Declaration of Easements, Covenants and Restrictions, made as of the 29th day of
January, 1999 by Landlord, and recorded on March 17, 1999 as Cook County
Recorder Document No. 99260848 (the "Declaration")) between and among or
affecting the Building and other buildings or structures or the Land or other
portions of the Project and adjacent properties or land pursuant to which
amenities or benefits are provided to the Project, including, without
limitation, those relating to roads, common parking and ingress and egress areas
and other facilities benefitting the Project; or any other expense or charge,
whether or not hereinbefore mentioned, which in accordance with sound accounting
and management principles applicable to first class buildings in the Applicable
Market Area, would be considered as an expense of managing, operating,
maintaining or repairing the Project. Notwithstanding anything to the contrary
contained in this Section 2(a)(iii), "Expenses" shall not include any of the
following costs or other items whether incurred by Landlord, its agents or
independent contractors or chargeable to the Project pursuant to reciprocal
easements or other agreements affecting the Project; any costs or other items
included within the meaning of the term "Taxes" (as hereinafter defined); costs
of alterations of the premises of tenants of the Building; depreciation charges;
interest and principal payments on mortgages; ground rental payments; real
estate brokerage and leasing commissions; any expenditures for which Landlord
has been reimbursed (other than pursuant to rent adjustment provisions in
leases); the cost of any repair or replacement made by Landlord because of the
total or partial destruction of or damage to the Building or the condemnation of
a portion thereof; salaries and benefits in respect of any executive employees
of Landlord, Landlord's managing agent (or their affiliates) above the grade of
building manager; except as provided in clause (A) below, the cost of any
capital improvements, repairs, alterations, additions, changes, replacements and
other items which under Generally Accepted Accounting Principles are properly
classified as capital expenditures (including, without limitation, capital
expenditures paid or incurred pursuant to the Declaration or any similar
agreements or declarations referred to hereinabove); any cost or fee paid to a
corporation or other entity related to or affiliated with Landlord or the
managing agent of the Building to the extent in excess of the amount which would
be paid in the absence of such relationship; the cost of decorating, painting or
alteration of space in the Building leased to tenants; cash allowances to
tenants for their leasehold improvements, alterations and decorations; the
portion of any expenses otherwise includable in Expenses which is allocable to
any other properties of Landlord or of any affiliates of Landlord or to other
buildings, such as the portion of the personnel benefits, expenses and salaries
of the type set forth in this paragraph of employees allocable to time spent by
such employees in connection with properties other than the Building or the
portion of the premiums for any insurance carried under "blanket" or similar
policies to the extent allocable to any property other than the Building;
advertising and promotional expenditures; costs and expenses incurred in
connection with the enforcement of this Lease or any other lease in the
Building, including, without limitation, attorneys' fees and disbursements in
connection with any summary proceeding to dispossess Tenant or any other tenant
or occupant of the Building; costs and expenses incurred in connection with, and
incidental to, the leasing of space in the Building, including, without
limitation, attorneys' fees and disbursements; costs and expenses incurred in
connection with preparing and negotiating this Lease or any other lease in the
Building; costs and expenses incurred in connection with or disputes with Tenant
or any other tenant or occupant in the
4
<PAGE>
Building, including, without limitation, attorneys', accountants' and
consultants' fees and disbursements; Landlord's general business overhead;
expenses incurred in amending mortgages or financing or refinancing the Project
or financing or refinancing improvements, replacements or repairs thereto;
expenses incurred in selling the Project or any portion thereof; the cost of
correcting defects in the construction of the Building or in the Building
equipment; any interest or penalty charges incurred by Landlord or assessed
against the Project due to the violation of any reciprocal easement or similar
agreement to which the Building is a party; costs of sculptures, paintings and
other objects of art located within the Building or on the Land, except only for
the cost of maintaining and protecting such objects in the public areas of the
Building or on the Land; the cost of overtime, penalties, interest or fines or
other similar expense incurred by reason of any violation of law or default
under this Lease by Landlord (other than overtime costs which would, under sound
management principles and practices, have been incurred regardless of the
existence of any such default by Landlord); "takeover expenses" (i.e., expenses
incurred by Landlord with respect to space located in another building of any
kind or nature in connection with the leasing of space in the Building); any
compensation paid to clerks, attendants or other persons in commercial
concessions operated by Landlord; overtime HVAC costs or electricity costs
charged separately to other tenants of the Building; the cost of repairs to the
Building incurred by reason of fire or other casualty or condemnation to the
extent that either (1) Landlord is compensated therefor through proceeds of
insurance or condemnation awards, or (2) Landlord failed to obtain insurance
against such fire, casualty or other risk (provided that insurance was available
at a commercially reasonable rate against a risk of such nature at the time of
such casualty, and further provided that a prudent landlord in the Applicable
Market Area would have purchased such insurance) (excluding, however, therefrom
reasonable deductible amounts); and costs incurred by Landlord for the
remediation of Hazardous Materials (as defined in item 6 of Exhibit D to this
Lease as of the date of this Lease), if any, (A) existing in the Building as of
the date of this Lease or (B) hereafter caused by any act of Landlord (The
foregoing exclusion from Expenses for Hazardous Materials does not apply to
materials which were not classified as Hazardous Materials [as defined in item 6
of Exhibit D] on the date of either (A) or (B) above, as the case may be.)..
"Applicable Market Area" for purposes of this Lease shall mean the so-called
O'Hare office market. Further,
(A) Notwithstanding the general exclusion of capital
expenditures from Expenses, the following shall be included in
the definition of "Expenses": the amortized portion each
Adjustment Year of the cost of any capital improvements, repairs,
alterations, additions, changes, replacements and other items
which under Generally Accepted Accounting Principles would be
classified as capital improvements to the Project made after the
date of this Lease (1) which are in good faith in whole or in
part (but if in part, then only to the extent so) intended to
reduce Expenses (including, without limitation, converting the
Building systems from the use of CFC's), or (2) to the extent
required under any governmental laws, regulations, or ordinances
which are not applicable to the Project as of the date of this
Lease, amortized on a straight line basis over the useful life of
such improvements (determined in accordance with Generally
Accepted Accounting Principles), together with interest on the
unamortized cost of any such improvement at
5
<PAGE>
the prevailing construction loan rate which Landlord is paying
therefor in the event that Landlord shall finance such capital
improvement or in the event that Landlord shall not elect to
finance such improvement at an assumed rate which Landlord would
be paying if it financed such improvement based upon LIBOR plus
five percent (5.00%).
(B) Notwithstanding anything contained in this clause (iii)
of Section 2(a) to the contrary, if the Building is not one
hundred percent (100%) occupied by tenants during all or a
portion of any Adjustment Year, then Landlord may make an
appropriate adjustment for such year of only those components of
Expenses which may vary depending upon the occupancy level of the
Building, employing Generally Accepted Accounting Principles (to
the extent applicable) and in any event sound accounting and
management principles. Any such adjustment shall also be deemed
expenses paid or incurred by Landlord and included in Expenses
for such year, as if the Building had been one hundred percent
(100%) occupied and the Landlord had paid or incurred such
expenses, to the end that the actual amounts of such variable
components of expenses be fairly borne by the tenants occupying
the Building. Notwithstanding the foregoing, in no event shall
Tenant be required to pay an amount in excess of the total actual
Expenses less amounts payable by other tenants of the Building on
account thereof.
(C) Notwithstanding anything contained in this clause (iii)
of Section 2(a) to the contrary, if any item of Expenses, though
paid or incurred in one year, relates to more than one Adjustment
Year, at the option of Landlord such item may be proportionately
allocated among such related Adjustment Years. Landlord shall
not, however, pay in one year any item which may (and utilizing
reasonable, prudent and customary business practices would) be
paid over a number of years so that the primary effect would be
to inequitably "bunch" Expenses into one or more Adjustment Years
to the material detriment of Tenant.
(iv) "Taxes" shall mean real estate taxes, assessments (whether
they be general or special), sewer rents, rates and charges, transit
taxes, taxes based upon the receipt of rent, and any other federal,
state or local governmental charge, general, special, ordinary or
extraordinary, which may now or hereafter be levied, assessed, or
imposed against, or in connection with the ownership, leasing or
operation of the Building or the Land, or both. In addition, Taxes
shall include the portion of Taxes for facilities under and or
pursuant to the Declaration allocable to the Project. "Taxes" shall
not include income taxes, interest or penalties for late payment of
Taxes, capital levy taxes, estate, succession or inheritance taxes,
excess profits taxes, transfer taxes imposed upon the transfer of
Landlord's interest in the Building or the Land or both or other
property, franchise taxes or any other taxes imposed upon or measured
by Landlord's income or profits, unless the same shall be imposed in
lieu
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<PAGE>
of real estate taxes or other ad valorem taxes. For purposes of this
Section, the Building and the Land are herein collectively called the
"Real Property."
Notwithstanding the foregoing,
(A) If at any time during the Term of this Lease (or any
renewal or extension thereof, if applicable) the method of
taxation then prevailing shall be altered so that any new or
additional tax, assessment, levy, imposition or charge or any
part thereof shall be imposed upon Landlord in addition to or in
place or partly in place of any such Taxes, or contemplated
increase therein, and shall be measured by or be based in whole
or in part upon the Real Property or the rents or other income
therefrom, then all such new taxes, assessments, levies,
impositions or charges or part thereof, to the extent that they
are so measured or based, shall be included in Taxes levied,
assessed or imposed against the Real Property to the extent that
such items would be payable if the Real Property were the only
property of Landlord subject thereto and the income received by
Landlord from the Real Property were the only income of Landlord.
(B) Notwithstanding the year for which any such taxes or
assessments are levied, (i) in the case of special taxes or
assessments which may be payable in installments, the amount of
each installment, plus any interest payable thereon, paid during
a calendar year shall be included in Taxes for that year, (ii) if
any taxes or assessments payable during any calendar year shall
be computed with respect to a period in excess of twelve calendar
months, then taxes or assessments applicable to the excess period
shall be included in Taxes for the year in which payable, and
(iii) except as otherwise provided in the preceding clauses (i)
and (ii), all references to taxes for a particular year shall be
deemed to refer to all taxes levied, assessed or imposed for such
year without regard to when such taxes are due and payable.
Notwithstanding the foregoing item (iii) of this paragraph (B),
if and only if the Lease Term shall not be extended beyond the
expiration of the Fourth (4th) Lease Year, taxes for the Fourth
(4th) Lease Year shall mean all taxes due and payable for and
during such Lease Year.
(C) Taxes shall also include any personal property taxes
(attributable to the calendar year in which paid) imposed upon
the furniture, fixtures, machinery, equipment, apparatus, systems
and appurtenances used in connection with the Real Property or
Project or the operation thereof (but shall exclude personal
property taxes on equipment or other personal property owned by
any of the tenants of the Building).
(v) "Rentable Area of the Building" shall mean the sum of the
rentable areas on all floors of the Building, and shall be deemed to
be 300,059 square feet.
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* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
(vi) "Rentable Area of the Premises" as of the date of this
Lease shall be deemed to be * * * * * rentable square feet.
(vii) "Tenant's Proportionate Share" from time to time shall
mean the percentage obtained by dividing the Rentable Area of the
Premises from time to time by the Rentable Area of the Building.
(b) Computation of Additional Rent.
Tenant shall pay Additional Rent for each Adjustment Year in an amount
equal to the product of the Tenant's Proportionate Share, multiplied by the
amount of Taxes and Expenses, respectively, for such Adjustment Year (said
products being called the "Tax Adjustment" and "Expense Adjustment").
(c) Payments of Additional Rent; Projections
Tenant shall pay Additional Rent to Landlord in the manner hereinafter
provided.
(i) Tenant shall make payments on account of the Tax Adjustment
and Expense Adjustment (any such payment with respect to any
Adjustment Year being also called "Additional Rent Progress Payment")
effective as of the Adjustment Date for each Adjustment Year as
follows:
(A) Projection of Expenses. Landlord may, prior to each
-----------------------
Adjustment Date or from time to time (subject to the limitation
set forth hereinafter) during the Adjustment Year in which such
Adjustment Date falls, deliver to Tenant a written notice or
notices ("Projection Notice") setting forth (1) Landlord's
reasonable, good faith, estimates, forecasts or projections
(collectively, the "Projections") of Expenses for such Adjustment
Year based on Landlord's budgets of Expenses, and (2) Tenant's
Additional Rent Progress Payment for such Adjustment Year based
upon the Projections. Landlord's budgets of Expenses and the
Projections based thereon may be revised by Landlord from time to
time based on changes in rates and other criteria which are
components of budget items.
(B) Expense Additional Rent Progress Payments. Until such
-----------------------------------------
time as Landlord furnishes a Projection Notice for an Adjustment
Year, Tenant shall pay to Landlord a monthly installment of
Expenses Additional Rent Progress Payment at the time of each
payment of Monthly Base Rent equal to the latest monthly
installment of Expenses Additional Rent Progress Payment. On or
before the later of (1) the first day of the next calendar month
following Landlord's service of a Projection Notice, or (2)
thirty (30) days following Landlord's service of a Projection
Notice ("Adjustment Payment Date") and on or before the first day
of each month thereafter, Tenant shall pay to Landlord one-
twelfth (1/12) of the Additional Rent
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Progress Payment shown in the Projection Notice. On or before the
Adjustment Payment Date, Tenant shall also pay Landlord a lump
sum equal to the Expense Additional Rent Progress Payment shown
in the Projection Notice less (1) any previous payments on
account of Expense Additional Rent Progress Payment made during
such Adjustment Year, and (2) monthly installments on account of
Additional Rent Progress Payment due for the remainder of such
Adjustment Year.
(C) Taxes Additional Rent Progress Payments. Except as
---------------------------------------
provided in the last sentence of this paragraph (C), Tenant shall
make monthly Additional Rent Progress Payments with respect to
Taxes based upon estimated Taxes for each Adjustment Year. The
amount of the Taxes Additional Rent Progress Payment shall be
one-twelfth (1/12) of the Tenant's Proportionate Share of such
estimated Taxes. The estimated Taxes shall be a reasonable, good
faith estimate of such Taxes by Landlord. Landlord may from time
to time furnish to Tenant a written notice ("Tax Statement")
setting forth the amount of Taxes required to be paid to Landlord
on account of Taxes Additional Rent Progress Payment and Tenant
shall thereafter commence making such payments. Notwithstanding
anything in this paragraph (C) to the contrary, if and only if
the Lease Term shall not be extended beyond the expiration of the
Fourth (4th) Lease Year, Tenant shall make monthly Additional
Rent Progress Payments with respect to Taxes for and during such
Fourth (4th) Lease Year based upon the Taxes which were payable
(or which would have been payable had Additional Rent been
applicable for such Adjustment Year of the Term hereof) for and
during the prior Lease Year.
(ii) Tenant agrees to pay monthly installments of Additional
Rent Progress Payment at a rate set forth in an initial Projection
Notice and Tax Statement from and after the first Adjustment Date of
the Term of this Lease until either or both components thereof are
changed pursuant to a Projection Notice or Tax Statement from Landlord
as provided above.
(iii) The Tax Adjustment and Expense Adjustment shall be prorated
for the portion of the Term falling within the Adjustment Year in
which the last Adjustment Date during the Term, as the Term may be
extended, if applicable, shall fall. Tenant agrees and acknowledges
that Landlord has made no representation, warranty or guaranty
relating to the amount of the Taxes or Expenses. The Tenant has had an
opportunity to consult with the Landlord with respect to the Taxes and
Expenses projected for the operation of the Project and has not relied
upon any statements or representations of Landlord in regard thereto
in executing this Lease and agreeing to perform the terms and
covenants of this Lease.
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(d) Taxes and Expenses Readjustments
The following readjustments with regard to the Tax Adjustment and
Expense Adjustment shall be made by Landlord and Tenant:
(i) Not later than April 30th following the end of each
Adjustment Year, Landlord shall notify Tenant in writing ("Landlord's
Expense Statement") of the actual amount of Expenses for the
Adjustment Year just ended and the amount of Tenant's Expense
Adjustment. If the Expense Adjustment owed for such Adjustment Year
(indicated by the Landlord's Expense Statement) exceeds the Expense
Additional Rent Progress Payment paid by Tenant during such Adjustment
Year, then Tenant shall, within thirty (30) days after the date of
Landlord's Expense Statement, pay to Landlord an amount equal to the
excess of the Expense Adjustment over the Expense Additional Rent
Progress Payment paid by Tenant during such Adjustment Year. If the
Expense Additional Rent Progress Payment paid by Tenant during such
Adjustment Year exceeds the Expense Adjustment owed for such
Adjustment Year, then Landlord shall refund such excess to Tenant
within thirty (30) days after the date of Landlord's Expense
Statement. Provided, however, if Tenant then owes Landlord in excess
of the then current month's Rent which is due and unpaid, Landlord may
retain such excess deposit and apply the same to the payment of such
due and unpaid Rent. If this Lease shall expire prior to the repayment
of such excess, Landlord shall pay to Tenant within thirty (30) days
following expiration the balance thereof not reasonably required for
payment of Additional Rent for the Adjustment Year in which the Lease
expires.
(ii) Not later than the later of sixty (60) days following the
date on which Landlord shall have received the actual final real
estate tax bills attributable to a particular Adjustment Year (the
"Tax Determination Date"), Landlord shall determine the actual amount
of Taxes to be used in calculating the Tax Adjustment for such
Adjustment Year, and shall notify Tenant in writing ("Landlord's Tax
Statement") of such Taxes and Tenant's Tax Adjustment for such
Adjustment Year. If the Tax Adjustment owed for such Adjustment Year
(indicated by a Landlord's Tax Statement actually delivered) exceeds
the Additional Rent Progress Payments with respect to the Tax
Adjustment paid by Tenant for such Adjustment Year, then on or before
thirty (30) days after receipt of Landlord's Statement, Tenant shall
pay to Landlord an amount equal to the excess of the Tax Adjustment
over the Additional Rent Progress Payments with respect to the Tax
Adjustment paid by Tenant for such Adjustment Year. If such Additional
Rent Progress Payments exceed the Tax Adjustment owed for such
Adjustment Year, then Landlord shall refund the difference to Tenant
within thirty (30) days after delivery of Landlord's Tax Statement.
Provided, however, if Tenant then owes Landlord in excess of the then
current month's Rent which is due and unpaid, Landlord may retain such
excess deposit and apply the same to the payment of such due and
unpaid Rent. In the event any portion of Taxes for any Adjustment Year
are refunded to Landlord, the Tax Adjustment for said Adjustment Year
shall be recomputed and Landlord shall
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promptly pay to Tenant the difference between the Tax Adjustment paid
by Tenant for that Adjustment Year and the Tax Adjustment as
recomputed.
(iii) No interest or penalties shall accrue on any amounts which
Landlord is obligated to pay to Tenant by reason of this Section 2(d).
(e) Books and Records. Landlord shall maintain books and records
showing Expenses and Taxes in accordance with sound accounting and
management practices consistently applied. Tenant or its representative, at
the sole cost and expense of Tenant, shall have the right to examine
Landlord's books and records showing Expenses and Taxes upon reasonable
prior notice and during normal business hours at any time within the one
hundred twenty (120) day period (the "Review Period") following the
furnishing by the Landlord to the Tenant of Landlord's Expense Statement or
Landlord's Tax Statement (as the case may be) provided for in Section 2(d).
Unless the Tenant shall take written exception to any item within the one
hundred fifty (150) day period (the "Exception Period") after the
furnishing of the Landlord's Expense Statement or Landlord's Tax Statement
(as the case may be) containing said item, such Landlord's Expense
Statement or Landlord's Tax Statement (as the case may be) shall be
considered as final and accepted by the Tenant. If Tenant takes exception
to any item in Landlord's Expense Statement or Landlord's Tax Statement (as
the case may be) within the applicable time period and if Landlord and
Tenant are unable to agree on the correctness of said item, then the
decision of said issue shall be referred to Landlord's Certified Public
Accountant (the "Auditor"), and the decision of said Auditor shall be
conclusively binding on the parties. The fees and expenses of the Auditor
shall be paid by Tenant, provided, however, that if the Auditor determines
that Landlord has made errors adverse to Tenant in excess of four percent
(4%) of the aggregate amount of Landlord's Expense Statement or Landlord's
Tax Statement, as the case may be, then Landlord shall pay the cost and
expenses of the Auditor.
(f) Proration and Survival. With respect to any Adjustment Year which
does not fall entirely within the Term, Tenant shall be obligated to pay as
Additional Rent for such Adjustment Year only a pro rata share of
Additional Rent as hereinabove determined, based upon the number of days of
the Term falling within the Adjustment Year. Following expiration or
termination of this Lease, Tenant shall pay any Additional Rent due to the
Landlord within thirty (30) days after the date Landlord's Expense
Statement or Landlord's Tax Statement, as the case may be, is sent to
Tenant. If and only if the Lease Term shall not be extended beyond the
expiration of the fourth (4th) Lease Year, and shall end during an
Adjustment Year, then the final reconciliation of Tax Adjustment and
Expense Adjustment as between Landlord and Tenant shall be made within
thirty (30) days following the expiration of the Fourth (4th) Lease Year
based upon the most recent ascertainable Taxes and Expenses applicable to
such Lease Year prorated accordingly, and Landlord shall refund to Tenant
or Tenant shall pay to Landlord Additional Rent as otherwise provided
herein based thereon. Without limitation on other obligations of Tenant or
Landlord which shall survive the expiration of the Term, the obligations of
Tenant to pay Additional Rent, the obligation of Landlord to refund any
excess Additional Rent Progress Payments and the obligation of
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Landlord to recompute and refund any Tax Adjustment in the event of a
refund of Taxes, all as provided for in this Section 2 shall survive the
expiration or termination of this Lease.
(g) No Decrease in Base Rent. In no event shall any Additional Rent
result in a decrease of the Base Rent payable hereunder as set forth in
Section 1 of this Lease.
(h) Additional Rent. Without limitation of the definition of Rent as
set forth in this Lease, all amounts payable by Tenant as or on account of
Additional Rent shall be deemed to be additional Rent becoming due under
this Lease.
3. Use of Premises. Tenant shall use and occupy the Premises for
general office space and for other lawful purposes reasonably ancillary
thereto (such as coffee and vending areas and employee lounge areas), subject to
applicable laws and ordinances and governmental rules and regulations, and
reasonable rules and regulations of Landlord (subject to Section 9 of this
Lease).
4. Prior Occupancy. If Tenant shall request and Landlord shall (in its
sole discretion with no obligation to do so) authorize Tenant to take occupancy
of all or any part of the Premises for the conduct of its business therein prior
to the Commencement Date of the Term, all of the covenants and conditions of
this Lease shall apply to and shall control such pre-Term occupancy, including
payment of Base Rent and Additional Rent for such pre-Term occupancy for any
period prior to the Commencement Date at the rate which would be applicable from
and after the Commencement Date.
5. Services. The Landlord shall furnish:
(a) Air-cooling and heating when necessary to provide a temperature
condition required (as reasonably determined by Landlord) for reasonable
comfort under normal business operations (as determined by Landlord), daily
from 8:00 A.M. to 6:00 P.M. (Saturdays 8:00 A.M. to 1:00 P.M.), Sundays and
Holidays excepted ("Business Hours"). Whenever machines or equipment are
used by Tenant in the Premises, including, without limitation, extra
lighting and electrical fixtures, which generate heat in excess of the
loads which are anticipated based upon Tenant's lighting and electrical
requirements as set forth on the Plans and for which the Building was
designed to accommodate, and which affect the temperature otherwise
maintained by the air-cooling system, Landlord reserves the right to
install a supplementary air conditioning system in the Premises or
elsewhere in the Building to temper such excess loads, and the cost of such
system and the expense of installation thereof shall be paid by Tenant
within thirty (30) after Landlord's demand. In addition, it is anticipated
that Tenant's computer room will require special supplementary HVAC so as
not to adversely affect the loads the Building was designed to accommodate,
and that the installation and operation of all such equipment required with
respect to Tenant's computer room will be at Tenant's sole cost and
expense. The expense resulting from the operation and maintenance of any
such supplementary air conditioning system shall be paid by the Tenant to
the Landlord as Additional Rent at rates established by Landlord. In
addition, Tenant shall pay for all air-cooling and heating requested and
furnished other than during the aforesaid
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Business Hours at charges reasonably promulgated by Landlord from time to
time for the Building. The rates and charges for supplementary or after
hours heating, cooling and ventilation shall be based upon Landlord's out-
of-pocket costs therefor plus such other factors as are customarily added
thereto in accordance with sound management principles which are utilized
in the Applicable Market Area, but without further mark-up thereon as
provided in Section 5(k) of this Lease. For after hours use on a business
day, Tenant shall give Landlord notice prior to 4:00 P.M. on such business
day and for after hours use on a Saturday, Sunday or Holiday, Tenant shall
notify Landlord prior to 4:00 P.M. on the prior business day. If more than
one tenant within a particular HVAC zone requests such after hours
services, the charges therefor shall be equitably allocated among such
tenants so requesting such services. The Premises as initially leased
pursuant to this Lease consist of one (1) HVAC zone. As used herein,
"Holidays" shall mean New Years Day, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. Landlord's agreements hereunder
are subject to Presidential and governmental restrictions, regulations and
guidelines on energy use.
(b) Cold water in common with other tenants from City of Chicago
mains for drinking, lavatory and toilet purposes drawn through fixtures
installed by the Landlord, or by Tenant in the Premises with Landlord's
written consent, and hot water in common with other tenants for lavatory
purposes from regular Building supply. Tenant shall pay Landlord for water
furnished for any other purpose as additional Rent on demand from time to
time at Landlord's out-of-pocket cost therefor without additional mark-up
pursuant to the provisions of Section 5(i) of this Lease, including the
cost of heating water in the case of hot water. The Tenant shall use
reasonable efforts not to waste or permit the waste of water.
(c) Janitor service and customary cleaning in and about the Building
and Premises, Saturdays, Sundays and Holidays excepted, in accordance with
specifications as reasonably determined by Landlord and consistent with
specifications for similar first class office buildings in the Applicable
Market Area. If Tenant shall request and Landlord shall agree to supply any
janitorial or cleaning services in addition to those provided as set forth
above, such services shall be supplied at the sole cost and expense of
Tenant, billed at Landlord's out-of-pocket cost therefor plus additional
mark-up pursuant to the provisions of Section 5(i) of this Lease. The
Tenant shall not provide any additional or supplementary janitor services
or cleaning without the Landlord's written consent, which consent may be
withheld in Landlord's sole discretion. Any contractors for such services
supplied by Tenant shall be subject to the reasonable approval of Landlord
(which shall not be unreasonably withheld), and shall comply with
reasonable and customary requirements of Landlord relative to contractors
working in the Building.
(d) Passenger elevator service in common with Landlord and other
tenants, daily from 8:00 A.M. to 6:00 P.M. (Saturdays from 8:00 A.M. to
1:00 P.M.), Sundays and Holidays excepted, and freight elevator service, in
common with Landlord and other tenants, at such time or times as may be
established by Landlord subject to reasonable scheduling. Operatorless
automatic elevator service shall be deemed "elevator service" within the
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meaning of this paragraph. At least one (1) elevator shall be available at
all times for use by Tenant.
(e) Electricity shall not be furnished by Landlord, but shall be
furnished by an approved electric utility company serving the area.
Landlord shall permit the Tenant to receive such service directly from such
utility company at Tenant's cost, and shall permit Landlord's wire and
conduits, to the extent available, suitable and safely capable, to be used
for such purposes. Tenant shall make all necessary arrangements with the
utility company for metering and paying for electric current furnished by
it to Tenant, and Tenant shall pay for all charges for electric current
consumed on the Premises during Tenant's occupancy thereof. The electricity
used during the performance of janitor service, the making of alterations
or repairs in the Premises, and for the operation of the Building's air
conditioning system at times other than as provided in paragraph 5(a) of
this Lease when requested by Tenant, or the operation of any special air
conditioning systems which may be required for data processing equipment or
for other special equipment or machinery installed by Tenant or otherwise
as provided in paragraph 5(a) of this Lease, shall be paid for by Tenant
either by payment to Landlord as additional Rent or by direct billing from
the electric or other applicable utility to Tenant. Tenant shall make no
alterations or additions to the base building electric equipment serving or
used within the Premises or to any equipment or appliances of Tenant
serving or used within the Premises which might adversely affect the base
building electric equipment, without the prior written consent of the
Landlord in each instance, which consent Landlord may withhold in its sole
discretion. Tenant shall purchase from Landlord or its agent lamps, bulbs,
ballasts and starters used in the Premises during the Term of this Lease.
Such purchases shall be at rates fixed by Landlord, which rates shall be
competitive in the market. Tenant covenants and agrees that at all times
its use of electric current shall never exceed the capacity of the feeders
to the Building or the risers or wiring installed therein. Any costs
attendant to additional electrical capacity will be at Tenant's sole cost
and expense.
(f) Window washing of all exterior windows in the Premises, both
inside and out, at intervals to be determined by Landlord.
(g) Subject to the other provisions of this Lease, including, without
limitation, Sections 2, 14 and 15, Landlord shall keep and maintain the
structure, foundation, roof and exterior of the Building, the base building
heating, air conditioning, ventilating, plumbing, electrical, life safety
and related systems, all supporting equipment and fixtures and base
building stairways, elevators, parking areas, drives, sidewalks and other
common areas in and about the Project in good order and repair, remove
snow, ice and debris from sidewalks, drives, lanes and parking areas and
maintain all landscaped areas on the Land at not less than the same general
standards now or hereafter applicable to first-class office buildings in
the Applicable Market Area, and such aforementioned areas in conformity
with all applicable laws, regulations, rules and ordinances.
(h) Tenant and its employees and visitors may use the unsupervised
outdoor parking areas and structures from time to time designated by
Landlord for parking of
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passenger vehicles in common with other tenants (and their employees and
visitors) of the Building and other buildings entitled to utilize the same
on a "first come, first served" basis, all subject to such reasonable rules
and regulations as from time to time may be imposed by Landlord, including,
without limitation, the right of Landlord to allocate or reserve specific
spaces for specific tenants and or their employees and visitors. Landlord
acknowledges that it is of importance to Tenant that it have adequate
parking available for its employees and visitors; and Tenant acknowledges
Landlord's concern that the nature of Tenant's business could adversely
affect the amount of available parking for Landlord's other tenants and
their employees and visitors. Accordingly, Landlord and Tenant agree as
follows respecting parking:
(i) This Lease is contingent upon Tenant being able to procure
such consents as are necessary (the "Required Consents") from the
Chicago Transit Authority ("CTA") to permit Tenant to use fifty (50)
spaces in the lot operated by the CTA at the Cumberland CTA "El" stop
by July 31, 1999. If Tenant shall be unable to obtain such Required
Consents by July 31, 1999, it may cancel this Lease by notice in
writing given to Landlord not later than August 6, 1999, time being of
the essence. If Tenant shall give a timely notice of cancellation,
this Lease shall terminate, Landlord shall return any Security Deposit
theretofore paid and the parties shall have no further rights against
each other under this Lease. If Tenant shall fail to give a timely
notice of cancellation or shall not have the right to give such
notice, this condition shall be deemed waived, and this Lease shall be
in full force and effect in accordance with its terms.
(ii) There shall be available for use by Tenant and its employees
and visitors (in common with other tenants [and their employees and
visitors] of the Building and other buildings entitled to utilize the
same on a "first come, first served" basis) (the foregoing use being
referred to as "Shared Use") not less than four (4) parking spaces for
every one thousand (1,000) square feet of Premises ("Tenant's Parking
Ratio"). If at any time during the Term of this Lease (A) there shall
not be available for use by Tenant and its employees and visitors on a
Shared Use basis parking in an amount equal to Tenant's Parking Ratio
(a "Parking Deficiency"); (B) Tenant shall give Landlord written
notice thereof in detail specifying, inter alia, the amount of the
Parking Deficiency and the times and days when such Parking Deficiency
exists (a "Parking Notice"); and (C) Landlord shall fail to cure such
Parking Deficiency within thirty (30) days following the giving of a
Parking Notice; then upon not less than ten (10) days' prior written
notice to Landlord, Tenant may obtain parking rights for the number of
parking spaces equal to the Parking Deficiency from property owners
other than Landlord or parking lot operators in the area other than
Landlord, and Landlord shall reimburse Tenant for its actual, market
cost thereof from time to time upon receiving evidence of such cost,
failing which reimbursement by Landlord Tenant may offset such cost
against Base Rent coming due under this Lease. It is understood and
agreed that Landlord shall at any time have the right to cure, in
whole or in part any Parking Deficiency, and in such event,
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Tenant's rights with respect to off-site parking at Landlord's expense
to cure a Parking Deficiency shall be reduced or eliminated
accordingly.
(iii) Tenant agrees as material obligations of Tenant under this
Lease (A) to comply with such additional parking rules and regulations
(including, without limitation, designations of location and
procedures for identification of vehicles and other matters) specific
to the use of the common parking areas by Tenant and its employees and
invitees ("Special Parking Rules"); and (B) to limit use of such
parking areas to a maximum of the number of spaces equal to Tenant's
Parking Ratio.
(i) Landlord shall make available to Tenant up to one hundred (100)
pairs of telephone lines of the telephone service cables currently or to be
installed through portions of the Building not included within the
Premises. Tenant shall arrange at its sole cost and expense for an outside
telephone service vendor to connect such number of pairs (up to 100) as it
desires to utilize in order to install its telephone system, provided that
the use by such telephone service vendor of any risers, equipment rooms
and/or other areas of the Building shall be subject to the prior approval
of Landlord, which approval shall not be unreasonably withheld or delayed,
but may be appropriately conditioned for the protection of the Building and
its efficient operation including, without limitation, to ensure access to
and use of the telephone service cables by Landlord and other tenants and
occupants of the Building. Landlord shall also make available to Tenant the
nonexclusive right to connect at Tenant's sole cost and expense to the
fiber optic cable to be installed prior to the Commencement Date in the
Building for voice, data and long distance services. Such connection shall
be subject to Landlord's reasonable approval and may be reasonably
conditioned in the same manner as with Tenant's telephone cable connection.
(j) Landlord shall provide for staffing on a twenty-four (24) hour
per day, seven (7) day per week basis of a security desk or station located
in the first floor lobby of the Building.
(k) Landlord shall provide such extra or additional services as it is
reasonably possible for the Landlord to provide, and as the Tenant may from
time to time request after approval in advance of the charge applicable to
such additional service. Tenant shall, for such extra or additional
services (other than for supplementary or after hours heating or cooling
and additional or supplementary water service, which services shall be
charged for as provided in subsections (a) and (b), respectively, of this
Section 5), pay one hundred ten percent (110%) of Landlord's actual cost
reasonably incurred in providing them, such amount to be considered
additional Rent hereunder. All charges for such extra or additional
services shall be due and payable ten (10) days after such services are
billed to Tenant.
(l) Tenant agrees that Landlord and its agents and employees shall
not be liable in damages, by abatement of Rent or otherwise (except as and
only to the extent expressly provided in the following sentence), for
failure to furnish or delay in furnishing any service when such failure or
delay is occasioned, in whole or in part, by repairs, renewals or
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improvements, by any strike, lockout or other labor trouble, by inability
to secure electricity, gas, water, or other fuel at the Building after
reasonable effort so to do, by any accident or casualty whatsoever, by the
act or default of Tenant or other parties, or by any cause beyond the
reasonable control of Landlord; and such failures or delays shall never be
deemed to constitute an eviction or disturbance of the Tenant's use and
possession of the Premises or relieve the Tenant from paying Rent or
performing any of its obligations under this Lease. Notwithstanding the
foregoing sentence if (i) a failure to provide the services described in
this Section 5 occurs or is delayed, (ii) the same is not caused by fire or
casualty or any act or omission of Tenant, its employees, agents or
contractors, or invitees (iii), such failure or delay renders all or any
portion of the Premises untenantable and (iv) Tenant cannot and does not
occupy the Premises or such portion thereof for the conduct of Tenant's
business therein for a period of three (3) consecutive business days, then
Rent shall abate for the portion of the Premises rendered untenantable and
which Tenant cannot and does not occupy for the conduct of Tenant's
business therein for the period of untenantability, and such abatement
shall cease when such portion of the Premises are again tenantable, whether
Tenant shall reoccupy the same or not. Should any service be interrupted
for any cause, Landlord shall promptly commence and diligently pursue the
restoration of such service.
The word "untenantable" as used in this Section 5 with reference to
the Premises shall be deemed to include not only those areas of the
Premises which are not physically fit for occupancy, but also those areas
of the Premises which, although not physically affected by the failure or
delay in the provision of services, are by reason of such failure or delay
with respect to other areas of the Premises or the Building not reasonably
suitable for the operation of Tenant's business; provided, however, that in
no event shall the Premises or any part thereof be deemed to be
untenantable hereunder so long as Tenant shall be occupying the same for
the conduct of its business therein.
6. Condition and Care of Premises. No promises of the Landlord to alter,
remodel, improve, repair, decorate or clean the Premises or any part thereof
have been made, and no representation respecting the condition of the Premises,
the Building or the Land, has been made to Tenant by or on behalf of Landlord
except to the extent expressly set forth herein, or in the Workletter. Tenant
shall not place or allow to be placed any furniture, office equipment or any
other article of personal property in the Premises near the glass of any door,
partition, wall or window which may be viewed from outside of the Premises and
which is unsightly or not otherwise in keeping with the first class nature of
the Building. This Lease does not grant any rights to light or air over or about
the property of Landlord. Except for any damage resulting from any act of
Landlord or its employees and agents, and repairs and services which are
Landlord's responsibility under this Lease, and subject to the provisions of
Section 14 of this Lease, Tenant shall at its own expense keep the Premises in
good repair and tenantable condition and shall promptly and adequately repair
all damage to the Premises caused by Tenant or any of its employees, agents or
invitees, including replacing or repairing all damaged or broken interior glass,
fixtures and appurtenances resulting from any such damage prior to expiration of
the applicable notice and cure period set forth in Section 16 herein; provided,
however, that with respect to any emergency repairs required to avoid any
further imminent and serious damage to property or any injury to persons, Tenant
shall do so promptly. If Tenant does not make the
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repairs and replacements described in this Section 6 within the time period set
forth in this Section 6, Landlord may following written notice to Tenant, but
need not, make such repairs and replacements (and shall at Tenant's request [to
the extent reasonably possible], at Tenant's sole additional cost, make the
repairs and replacements after normal working hours), and in such event Tenant
shall pay Landlord one hundred ten percent (110%) of the cost incurred by
Landlord therefor within ten (10) days after receipt of an invoice from
Landlord. All such repairs shall be made by Tenant subject to and in accordance
with the provisions of Section 11 of this Lease as may be applicable.
7. Return of Premises. At the termination of this Lease by lapse of time
or otherwise or upon termination of Tenant's right of possession without
terminating this Lease, Tenant shall surrender possession of the Premises to
Landlord and deliver keys to all locks to and within the Premises to Landlord
and make known to the Landlord the combination of all locks or vaults then
remaining in the Premises, and shall return the Premises and all equipment and
fixtures of the Landlord therein to Landlord in as good condition as when Tenant
originally took possession, ordinary wear and tear, loss, or damage by fire or
other casualty and damage resulting from the acts of Landlord or its employees
or agents excepted, failing which Landlord may restore the Premises and such
equipment and fixtures to such condition and Tenant shall pay one hundred ten
percent (110%) of the cost of such work reasonably incurred to Landlord within
ten (10) days after written demand from Landlord.
All installations, additions, flooring, carpeting, partitions, hardware,
light fixtures, non-trade fixtures and improvements, temporary or permanent
(collectively, "Installations"), except moveable furniture (including furniture
systems and partitions) and equipment and trade fixtures (which, without
limitation, shall include Tenant's computer installations, which shall not in
any event be deemed to be Installations) belonging to Tenant, in or upon the
Premises, whether placed there by Tenant or Landlord, shall be Landlord's
property and remain upon the Premises, all without compensation, allowance or
credit to Tenant.
Tenant shall remove Tenant's moveable furniture (including furniture
systems and furniture partitions in the nature of "cubicles"), machinery, safes,
trade fixtures and other items of movable personal property of every kind and
description from the Premises prior to the end of the Term or ten (10) days
following termination of this Lease or Tenant's right of possession, whichever
might be earlier, failing which Landlord may do so and thereupon the provisions
of Section 16(f) shall apply. At Tenant's request, upon the Commencement Date,
Landlord and Tenant shall agree upon a list delineating Tenant's trade fixtures
installed in the Premises as of the Commencement Date, which Tenant shall remove
at the expiration of this Lease.
Notwithstanding the foregoing, if prior to the end of the Term or within
ten (10) days following termination of this Lease or Tenant's right of
possession, whichever might be earlier, Landlord so directs by notice, Tenant,
at Tenant's sole cost and expense, shall promptly remove such Installations
placed in the Premises by or on behalf of Tenant as are designated in such
notice, provided that (a) such designated Installations are of a unique or
special nature or might otherwise be difficult or costly to remove (such as,
without limitation, special or extensive wiring or electrical installations,
HVAC installations, computer rooms, raised floors, staircases and elevators and
shafts
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therefor and safes), and (b) prior to or at the time of the approval of the
Plans therefor pursuant to the Workletter or Section 11, as the case may be,
Landlord shall have advised Tenant in writing that it might require removal
thereof. Tenant shall repair any damage to the Premises caused by such removal
to a reasonable architectural whole, failing which Landlord may remove the same
and repair the Premises, and in such event Tenant shall pay to Landlord one
hundred ten percent (110%) of the expense thereof reasonably incurred by
Landlord within ten (10) days following written demand from Landlord.
All obligations of Tenant under this Section 7 shall survive the expiration
of the Term or sooner termination of this Lease.
8. Holding Over. The Tenant shall pay Landlord for each day Tenant
retains possession of the Premises or any part thereof after termination of this
Lease, by lapse of time or otherwise, an amount which is one hundred fifty
percent (150%) of the amount of Rent for a day (computed on a year of 365 days)
based on the annual rate of Base Rent and Additional Rent applicable under
Sections 1 and 2 to the period in which such possession occurs, and Tenant shall
pay all damages, consequential as well as direct, sustained by Landlord by
reason of such retention. In no event shall such holdover or any acceptance of
Rent by Landlord after such termination constitute a renewal of the Term.
Nothing in this Section contained, however, shall be construed or operate as a
waiver of Landlord's right of re-entry or any other right of Landlord.
9. Rules and Regulations. Tenant agrees for itself, its employees and
agents to comply, and to use reasonable efforts to cause its clients, customers,
invitees and guests to comply with the rules and regulations set forth in
Exhibit D attached to this Lease and made a part hereof, and such other rules
and regulations as shall be adopted by Landlord pursuant to Section 10(m) of
this Lease and disclosed to Tenant in writing prior to enforcement thereof.
Nothing in this Lease contained shall be construed to impose upon Landlord
any duty or obligation to enforce said rules and regulations, or the terms,
covenants and conditions of any other lease against any other tenant or any
other persons, and Landlord shall not be liable to Tenant for violation of the
same by any other tenant, its employees, agents, invitees, or by any other
person. Landlord shall not enforce any rule or regulation applicable to the
Building against Tenant in a discriminatory manner.
10. Rights Reserved to Landlord. Landlord reserves the following rights,
exercisable without notice (except as provided in this Section 10) and without
liability to Tenant for damage or injury to business, or (except as otherwise
specifically provided in this Lease) property or person, and without effecting
an eviction or disturbance of Tenant's use or possession or giving rise to any
claim for setoff or abatement of Rent (except as specifically provided in this
Lease) or affecting any of Tenant's obligations under this Lease:
(a) To change the name or street address of the Building upon sixty
(60) days' prior written notice.
(b) To install and maintain signs on the exterior and interior of the
Building.
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(c) To prescribe the location and style of the suite number and
identification sign or lettering for the Premises and all other Building
signage as Landlord shall determine in its sole discretion.
(d) To retain at all times, and to use in appropriate instances, pass
keys to the Premises, except with respect to designated "secure areas," if
any, of the Premises, as to which Landlord may retain pass keys for use in
the case of an emergency posing imminent danger to life or property
including, without limitation, the Building. With respect to access to a
secure area in other than an emergency situation as described in the
preceding sentence, Tenant shall designate a person or persons who will be
reasonably available at reasonable hours to provide access to such secure
areas, if any. Other than in the case of an emergency as described in this
subsection (d) Landlord shall not utilize the pass key to any such secure
areas without being accompanied by the designated person.
(e) To grant to anyone the right to conduct any business in the
Building which is consistent with a first-class office building, whether or
not it is the same as or similar to the use expressly permitted to Tenant
by Section 3 of this Lease.
(f) To exhibit the Premises at reasonable hours upon reasonable prior
verbal advice to Tenant to prospective lenders and purchasers, and to
prospective tenants during the last twelve (12) months of the Term, as the
same may be extended; provided no such exhibition of the Premises shall
unreasonably interfere with the normal course of Tenant's business being
operated in the Premises.
(g) Subject to Section 10(d) to enter the Premises at reasonable
hours upon reasonable prior verbal advice to Tenant for reasonable
purposes, including inspection and supplying janitorial service or other
service to be provided to Tenant hereunder; provided prior verbal advice
shall not be required for customary janitorial services, inspection and
repairs; and further provided no such entry into the Premises shall
unreasonably interfere with the normal course of Tenant's business being
operated in the Premises.
(h) To require all persons entering or leaving the Building during
such hours as Landlord may from time to time reasonably determine to
identify themselves to watchmen by registration or otherwise, and to
establish their right to enter or leave in accordance with the provisions
of paragraph 1 of Exhibit D, Rules and Regulations, attached to this Lease.
In case of fire, invasion, insurrection, mob, riot, civil disorder, public
excitement or other commotion, or threat thereof, Landlord reserves the
right to limit or prevent access to the Building during the continuance of
the same, shut down elevator service, activate elevator emergency controls,
or otherwise take such action or preventive measures deemed necessary by
Landlord for the safety of the tenants and other occupants of the Building
or the protection of the Building and the property in the Building. Tenant
agrees to cooperate in any reasonable safety program developed by Landlord.
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(i) To control and prevent access to mechanical and other areas of
the Building which are not general public common areas.
(j) Provided that reasonable access to the Land, Building and
Premises shall be maintained and the business of Tenant shall not be
interfered with unreasonably, to rearrange, relocate, enlarge, reduce or
change corridors, exits, entrances in or to the Building and the Land and
to decorate and to make, repairs, alterations, additions and improvements,
structural or otherwise, in or to the Building, the Land or any part
thereof, and any adjacent building, land, street or alley, including for
the purpose of connection with or entrance into or use of the Building and
the Land in conjunction with any adjoining or adjacent building or
buildings or other structures, including, without limitation, any parking
structures, now existing or hereafter constructed, and may for such
purposes erect scaffolding and other structures reasonably required by the
character of the work to be performed, and during such operations may enter
upon the Premises and take into and upon or through any part of the
Building, including the Premises, all materials that may be required to
make such repairs, alterations, improvements, or additions, and in that
connection Landlord may temporarily close public entryways, other public
spaces, stairways or corridors and interrupt or temporarily suspend any
services or facilities agreed to be furnished by Landlord, all without the
same constituting an eviction of Tenant in whole or in part and without
abatement of Rent by reason of loss or interruption of the business of
Tenant or otherwise, and without in any manner rendering Landlord liable
for damages or relieving Tenant from performance of Tenant's obligations
under this Lease. To the extent such work in the Premises shall
unreasonably disrupt the conduct of Tenant's business in the Premises, at
Tenant's request, to the extent reasonably possible, Landlord shall make
such repairs, alterations, improvements and additions in the Premises after
Tenant's ordinary business hours, and the cost of such overtime and
additional expenses resulting therefrom shall be paid by Tenant. Landlord's
actions pursuant to the provisions of this subsection ( j) are subject in
all events to the provisions of Section 5(l) of this Lease.
(k) To install gates, traffic regulating devices, security systems,
and directional signage, make, prescribe and adopt such reasonable rules
and regulations, in addition to or other than or by way of amendment or
modification of the rules and regulations contained in Exhibit D attached
to this Lease, relating to use of parking structures, parking spaces and
parking areas, including, but not limited to, vehicle size, direction of
traffic, loading and unloading of vehicles and the like.
(l) To designate and select agents, employees and contractors to
perform Landlord's obligations in the Building and on the Land, whether or
not affiliated with Landlord.
(m) From time to time to prescribe, make and adopt such reasonable
rules and regulations, in addition to or other than or by way of amendment
or modification of the rules and regulations contained in Exhibit D
attached to this Lease or other Sections of this Lease, for the protection
and welfare of the Building and its tenants and occupants and their
respective employees and invitees, as the Landlord may determine in the
exercise of its
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reasonable discretion, which shall be enforceable upon receipt of prior
written advice of same. The Tenant agrees to abide by all such rules and
regulations. In any conflict between this Lease and the rules and
regulations, this Lease shall control.
11. Alterations. Tenant shall not make alterations in or additions or
improvements to the Premises without advance notice thereof to Landlord and
Landlord's advance written consent in each instance, which consent shall not be
unreasonably withheld or delayed (but may be reasonably conditioned), so long as
the proposed alteration, addition or improvement does not involve a modification
of or otherwise affect the Building structure or any of the base building
systems, including, without limitation, any of the mechanical (including,
without limitation, heating, ventilating and air conditioning), electrical or
plumbing systems or other systems in or portions of the Building for which
Landlord is responsible pursuant to this Lease ("Base Building Work"). All work
shall be at Tenant's expense and done by contractors employed by or on behalf of
Tenant, and shall comply with all insurance, lien waiver and contractor's
affidavit and other reasonable and customary requirements of Landlord, and with
all ordinances and regulations of the City of Chicago or any department or
agency thereof, the requirements of all statutes and regulations of the State of
Illinois or of any department or agency thereof and any applicable federal laws
and regulations. All plans and specifications for any alterations, additions or
improvements shall be prepared by Tenant's architects or engineers at Tenant's
expense, and submitted to Landlord for its approval, such approval not to be
unreasonably withheld or delayed beyond thirty (30) days (but may be reasonably
conditioned); provided, however, Landlord may disapprove or withhold consent or
further condition consent as to plans and specifications for Base Building Work
in its sole discretion. Tenant's contractors, architects or engineers shall be
subject to Landlord's prior written approval, and all work shall be subject to
such reasonable additional requirements and regulations as Landlord or its
lender may from time to time impose in the exercise of its or their reasonable
discretion. All additions and alterations shall be installed by Tenant in a good
and workmanlike manner and only new, high grade materials shall be used.
Tenant shall reimburse Landlord for any actual out-of-pocket costs incurred
by Landlord in the review of Tenant's plans and specifications for any
alterations, additions or improvements and supervision of the job, including,
without limitation, the charges of any affiliate of Landlord which supervises,
manages or administers construction work, at Landlord's customary rates
therefor. In no event, however, shall Landlord, its Members or any affiliates
thereof or any member, partner, shareholder, director, officer, agent or
employee of any of the foregoing be responsible for any construction means,
methods or safety precautions in respect to any such work, nor shall any of the
foregoing persons and entities be responsible for the accuracy or completeness
or the compliance with law of any plans submitted for review and approval.
Prior to commencing any work in connection with improvements, alterations
or additions, Tenant shall furnish Landlord with certificates of insurance
evidencing such insurance coverage as reasonably and customarily required by
Landlord from all contractors performing labor and furnishing materials insuring
Landlord and its Members and their respective members, partners, shareholders,
directors, officers, agents and employees (collectively, the "Landlord
Indemnitees") against loss, cost, damage or liability arising from or incurred
in connection with any such improvements, additions or alterations.
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Notwithstanding anything in this Section 11 to the contrary, to the extent
permitted by law, and subject to the provisions of Section 19(a) of this Lease,
Tenant hereby agrees to indemnify and hold harmless the Landlord Indemnitees
from and against all loss, costs, including, without limitation, reasonable
attorneys' fees and damages which any of such Landlord Indemnitees may incur by
reason of or arising out of the performance of any improvements, alterations or
additions in and to the Premises as contemplated by this Section 11, except to
the extent caused by the negligence or intentional misconduct of any of the
Landlord Indemnitees.
12. Assignment and Subletting. Tenant shall not, without the prior
written consent of Landlord in each instance, which it may in its sole
discretion give or withhold, except as provided hereinafter, (a) assign,
transfer, mortgage, pledge, hypothecate or encumber or subject to or permit to
exist upon or be subjected to any lien or charge, this Lease or any interest
under it, (b) allow to exist or occur any transfer of or lien upon this Lease or
the Tenant's interest herein by operation of law, (c) sublet the Premises or any
part thereof, or (d) permit the use or occupancy of the Premises or any part
thereof for any purpose not consistent with Section 3 of this Lease or by anyone
other than the Tenant and Tenant Affiliates and their employees.
Specifically, without limiting the generality of the foregoing, without the
prior written approval of Landlord, which may be given or refused in Landlord's
absolute discretion, Tenant expressly covenants and agrees not to enter into any
lease, sublease, license, concession or other agreement for use, occupancy or
utilization of the Premises which provides for rental or other payment for such
use, occupancy or utilization based in whole or in part on the net income or
profits derived by any person from the property leased, used, occupied or
utilized (other than an amount based on a fixed percentage or percentages of
receipts or sales), and that any such purported lease, sublease, license,
concession or other agreement shall be absolutely void and ineffective as a
conveyance of any right or interest in the possession, use, occupancy or
utilization of any part of the Premises.
No assignment, subletting, use or occupancy, or transfer with or without
Landlord's consent shall operate to relieve the Tenant from any covenant or
obligation hereunder except to the extent, if any, expressly provided for in
Landlord's consent or otherwise in writing signed by Landlord (which release of
Tenant from any covenant or obligation Landlord shall have no obligation to
give), or be deemed to be a consent to or relieve Tenant, or any such assignee,
sublessee, or transferee from obtaining Landlord's consent, if required, to any
subsequent assignment, transfer, lien, charge, subletting, use or occupancy.
Tenant shall, by notice in writing, advise Landlord of its desire from, on
and after a stated date (which shall not be less than thirty (30) days after the
date of Tenant's notice) to assign this Lease or sublet any part or all of the
Premises for the balance or any part of the Term and, in such event, Landlord
shall within thirty (30 days after receipt of Tenant's notice, together with all
other required information as described hereinafter, either (a) recapture the
space described in Tenant's notice in the manner provided hereinafter, or (b)
approve or disapprove such sublease or assignment. If Landlord shall not
recapture the space in Tenant's notice, then, except as provided in the second
paragraph of this Section 12, Landlord shall not unreasonably withhold or delay
its consent to a
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sublease of all or part of the Premises or an assignment of this Lease. Landlord
shall not be deemed to have unreasonably withheld its consent if (a) Tenant is
then in default hereunder; (b) any notice of termination of this Lease or
termination of Tenant's possession shall have been given under Section 16
hereof; (c) the portion of the Premises which Tenant proposes to sublease,
including the means of ingress and egress thereto and the proposed use thereof,
and or the remaining portion of the Premises will violate any City, State or
federal law, ordinance or regulation; (d) the proposed use of the Premises by
the subtenant or assignee does not conform with the use set forth in Section 3
hereof; (e) in the reasonable judgment of Landlord, the proposed subtenant or
assignee is of a character or is engaged in a business which would be
deleterious to the reputation of the Building as a first-class office building,
or the subtenant or assignee is not sufficiently financially responsible to
perform its obligations under the proposed sublease or assignment; or (f) the
proposed subtenant or assignee is an occupant of the Building or is then
negotiating with Landlord for the lease of space in the Building; provided,
however, that the foregoing are merely examples of reasons for which Landlord
may withhold its consent, and shall not be deemed exclusive of any other reasons
for reasonably withholding consent, whether similar or dissimilar to the
foregoing examples.
Tenant's notice shall state or otherwise include with such notice the name
and address of the proposed subtenant or assignee, financial and other
information respecting such proposed subtenant or assignee, the proposed
financial and other material terms of the transaction (and include a true and
complete copy of any letter of intent or other document then existing, if any,
respecting the proposed transaction) and such other information and
documentation respecting the proposed subtenant or assignee, as the case may be,
and/or the transaction as Landlord may reasonably request in order to exercise
its right to consent or refuse consent to such proposed sublease or assignment,
as the case may be.
If Landlord shall timely elect to recapture the space set forth in Tenant's
notice, such recapture notice shall terminate this Lease with respect to the
space therein described as of the date stated in Tenant's notice. If Tenant's
notice shall cover all of the space hereby demised, and if Landlord shall give
the aforesaid recapture notice with respect thereto, the Term of this Lease
shall expire and end on the date stated in Tenant's notice as fully and
completely as if that date had been herein definitely fixed for the expiration
of the Term. If Tenant's notice shall cover less than the entire Premises, the
space proposed to be sublet and the retained space must be a leasable unit in
compliance with all applicable codes and ordinances. If this Lease be terminated
pursuant to the foregoing with respect to less than the entire Premises, the
Rent and the Tenant's Proportionate Share as defined herein shall be adjusted on
the basis of the number of rentable square feet retained by Tenant, and this
Lease as so amended shall continue thereafter in full force and effect.
Notwithstanding the foregoing, in the case of a sublease of part, but less
than all, of the Premises, Landlord shall only have the right to terminate this
lease if (a) the space which Tenant proposes to sublease, when taken together
with all other portions of the Premises then subleased by Tenant for a term or
terms which will be in any part concurrent with the term of the proposed
sublease, will exceed one-third (1/3) of the then Rentable Area of the Premises,
(b) the term, including all extensions and renewals, of the proposed sublease
will be more than eighteen (18) months or (c) the term, including all extensions
and renewals, of the proposed sublease will expire
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after the date which is six (6) months prior to the date on which the Term of
this Lease, including all exercised extensions or renewals thereof, will expire.
Notwithstanding anything to the contrary in this Section 12, so long as any
assignee or successor Tenant by reason of merger or asset purchase or other
transaction contemplated by this grammatical paragraph which shall have the
primary responsibility for complying with the obligations of Tenant under this
Lease shall have a financial condition (based upon net worth, earnings and
credit rating) equal to or greater than the financial condition of the named
Tenant hereunder as of the date of this Lease (as disclosed by financial
information provided to Landlord [the "Financial Information"], which Tenant
hereby represents and warrants is true, complete and correct, and accurately
represents the financial condition of Tenant as of the date of this Lease), as
determined by Landlord in its sole discretion, upon notice to Landlord, but
without the requirement of Landlord's consent, and without the right of any
recapture by Landlord, Tenant may assign this Lease or sublet or allow use of
the Premises, or any portion thereof by a Tenant Affiliate. Further, in the
event that such Tenant Affiliate shall have a financial condition (based upon
net worth, earnings and credit rating) equal to or greater than the financial
condition of the named Tenant hereunder as of the date of such assignment (as
disclosed by then current Financial Information which Tenant shall represent as
true, complete and correct, and accurately representing the financial condition
of Tenant as of such date), as determined by Landlord in its sole discretion,
then Landlord shall not unreasonably withhold its consent to releasing such
named Tenant from this Lease. A "Tenant Affiliate" shall mean: (a) any person,
corporation, partnership, trust or other entity which controls or is controlled
by or is under common control with Tenant; (b) any corporation resulting from a
merger or consolidation with Tenant; (c) any person, corporation, partnership,
trust or other entity succeeding to the business or assets of Tenant or (d) any
person, corporation, partnership, trust or other entity which acquires all or
substantially all of the assets or business of Tenant, provided, however, that
any assignee assumes in full the obligations of Tenant under this Lease. As used
in the definition of "Tenant Affiliate" the term "control" or "controlling"
shall mean (i) the possession, directly or indirectly, of the power to vote
fifty-one percent (51%) or more of the stock, voting trust certificates or other
securities having voting power for the election of directors of a corporate
entity, (ii) the status of a general partner of a general or limited partnership
(provided that, in addition to the ownership of all of the general partnership
interests, a total of fifty-one percent (51%) of the partnership interests are
owned) or (iii) the possession of the power to otherwise direct or cause the
direction of the management and policies of an entity, whether through the
ownership of voting stock, voting trust certificates or other securities or of
partnership interests or by contract or otherwise.
If Tenant, or anyone succeeding to the interest of Tenant shall assign this
Lease or sublet the Premises to any person or entity other than a Tenant
Affiliate, or any part thereof at a rental or for other monetary consideration
in excess of the Rent or pro rata portion thereof due and payable by Tenant
under this Lease, fifty percent (50%) of said excess rent or other consideration
shall be paid to Landlord promptly when received under any such assignment or
subletting as additional Rent hereunder; it being agreed, however, that Landlord
shall not be responsible for any deficiency if Tenant shall assign this Lease at
a loss or sublet the Premises or any part thereof at a rental less than that
provided for herein. In determining the amount of rent or other consideration in
excess of the Rent payable by Tenant under this Lease pursuant to this
paragraph, there shall first be deducted
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from the rent or other consideration payable to Tenant the aggregate of the
actual, reasonable out-of-pocket costs of assigning this Lease or subletting the
Premises (or part thereof), as the case may be, including, without limitation,
customary brokerage commissions, marketing costs, reasonable legal fees paid to
third parties other than any attorney who is an employee of either Tenant or any
Tenant Affiliate, costs of tenant improvements and other costs to prepare the
space or contributions thereto, lease takeover payments, allowances, concessions
and other out-of-pocket expenses actually and reasonably incurred.
Notwithstanding anything to the contrary contained in this Section 12, the
transfer of any interest in Tenant which is effected through the sale of the
shares of Tenant (or, following an assignment or sublet to any Tenant Affiliate,
the shares of such Tenant Affiliate or any other Tenant Affiliate) through the
"over the counter market" or through any recognized stock exchange, shall not be
deemed to be an assignment or transfer of this Lease.
13. Waiver of Certain Claims; Indemnity by Tenant.
(a) Except for the negligent or wilful acts of Landlord or its employees
or agents, and to the extent not otherwise prohibited by law, and subject to the
provisions of subsection (b) of this Section 13, Tenant releases Landlord
Indemnitees from and waives all claims for damages to person or property
sustained by the Tenant or by any occupant of the Premises, or by any other
person, resulting directly or indirectly from fire or other casualty, cause or
any existing or future condition, defect, matter or thing in or about the
Premises, the Building, the Land, or any adjoining land, or any part thereof, or
from any equipment or appurtenance therein or thereon, or from any accident in
or about the Building or the Land, or any adjoining land, or from any act or
neglect of any tenant or other occupant of the Building or any part thereof or
of any other person. This Section 13(a) shall apply especially, but not
exclusively, to damage caused by water, snow, frost, steam, excessive heat or
cold, sewerage, gas, odors or noise, or the bursting or leaking of pipes or
plumbing fixtures, broken glass, sprinkling or air conditioning devices or
equipment, or flooding of basements, and shall apply without distinction as to
the person whose act or neglect was responsible for the damage and whether the
damage was due to any of the acts specifically enumerated above, or from any
other thing or circumstance, whether of a like nature or of a wholly different
nature. If any damage to the Premises or the Building or any equipment or
appurtenance therein, whether belonging to Landlord or to other tenants or
occupants of the Building, results from any act or neglect of the Tenant, its
employees, agents or invitees, then subject to Section 19(a) and the provisions
of the following sentence, Tenant shall be liable therefor, and Landlord may at
its option (but shall have no obligation to), repair such damage at Tenant's
sole cost and expense. Tenant shall upon demand by Landlord reimburse Landlord
for all costs of such repairs and damages to the extent such cost is in excess
of amounts, if any, recovered under any property insurance policy. All personal
property belonging to the Tenant or any occupant or invitee of the Premises that
is in the Building, on the Land or any adjoining land, or in the Premises shall
be there at the risk of the Tenant or other person only, and Landlord shall not
be liable for damage thereto or theft or misappropriation thereof, unless
arising from the negligence or intentional misconduct of any Landlord
Indemnitees (subject, however, to the provisions of Section 19(a) of this
Lease).
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(b) Except for the negligent or wilful acts of Landlord or its employees
or agents, and to the extent not otherwise prohibited by law, and subject to the
provisions of Section 19(a) and the following sentence, Tenant agrees to hold
the Landlord Indemnitees harmless and to indemnify each of them against claims
and liabilities, including reasonable attorneys' fees, for injuries to all
persons and damage to or theft or misappropriation or loss of property occurring
in or about the Premises arising from Tenant's occupancy of the Premises or the
conduct of its business or from any activity, work, or thing done, permitted or
suffered by Tenant in or about the Premises or from any breach or default on the
part of Tenant in the performance of any covenant or agreement on the part of
Tenant to be performed pursuant to the terms of this Lease. Notwithstanding the
foregoing sentence, (i) Tenant shall only be liable for the cost of any damage
to or theft or misappropriation or loss of property to the extent such cost is
in excess of amounts, if any, recovered under any property insurance policy, and
(ii) Tenant shall not be required to indemnify any Landlord Indemnitee to the
extent of any loss caused by such Landlord Indemnitee's negligence or wilful
misconduct.
(c) Except for the negligent or wilful acts of Tenant or its employees or
agents, and to the extent not otherwise prohibited by law, and subject to the
provisions of Section 19(a) and the following sentence, Landlord agrees to hold
Tenant and its shareholders, directors, officers, agents, servants and employees
(collectively the "Tenant Indemnitees"), harmless and to indemnify each of them
against claims and liabilities, including reasonable attorneys' fees, for
injuries to all personas and damage to or theft or misappropriation or loss of
property occurring in the Building (other than in the Premises) or on the Land
to the extent arising from any of the Landlord Indemnitees' negligence or wilful
acts, from any breach or default on the part of Landlord in the performance of
any covenant or agreement on the part of the Landlord to be performed pursuant
to the terms of this Lease or from any liability on account of the existence of
any Hazardous Materials (as defined in item 6 of Exhibit D to this Lease)
existing in the Building as of the date of this Lease or hereafter caused by any
act of Landlord. Notwithstanding the foregoing sentence, (i) Landlord shall only
be liable for the cost of any damage to or theft or misappropriation or loss of
property to the extent such cost is in excess of amounts, if any, which would be
recovered (net of all customary and reasonable deductibles) under an "all risk"
property insurance policy for the full replacement cost of all property which
Tenant is required under this Lease to insure (whether or not any policy is, in
fact, carried), and (ii) Landlord shall not be required to indemnify any Tenant
Indemnitee to the extent of any loss caused by such Tenant Indemnitee's
negligence or wilful misconduct.
14. Damage or Destruction by Casualty. If the Premises or any part of the
Building shall be damaged by fire or other casualty, and if such damage does not
render all or a substantial portion (hereinafter defined) of the Premises or the
Building untenantable or inaccessible, then Landlord shall proceed to repair and
restore, with reasonable promptness, the same to its prior existing condition,
subject to reasonable delays for insurance adjustments and delays caused by
matters beyond Landlord's control. If any such damage renders all or a
substantial portion of the Premises or the Building untenantable or
inaccessible, Landlord shall, with reasonable promptness after the occurrence of
such damage, but within sixty (60) days thereof, and in good faith estimate the
length of time that will be required to substantially complete the repair and
restoration of such damage and shall by notice advise Tenant of such estimate.
If it is so estimated that the amount of time required to substantially complete
such repair and restoration will exceed two hundred seventy (270) days from the
date such damage occurred, then either Landlord or Tenant (but as
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to Tenant only if a material portion of the Premises would remain untenantable
or inaccessible for such two hundred seventy (270) day period) shall have the
right to terminate this Lease as of the date of such damage upon giving notice
to the other at any time within thirty (30) days after Landlord gives Tenant the
notice containing said estimate (it being understood that Landlord may, if it
elects to do so, also give such notice of termination together with the notice
containing said estimate). Unless this Lease is terminated as provided in the
preceding sentence, Landlord shall proceed with reasonable promptness to repair
and restore the Premises, subject to reasonable delays for insurance adjustments
and delays caused by matters beyond Landlord's control, and also subject to
zoning laws and building codes then in effect. Landlord shall have no liability
to Tenant, and Tenant shall not be entitled to terminate this Lease (except as
hereinafter provided) if such repairs and restoration are not in fact completed
within the time period estimated by Landlord, so long as Landlord shall proceed
with reasonable diligence to complete such repairs and restoration. If, however,
said repairs and restoration are not completed (a) in the case of the Term of
this Lease not having been extended beyond the expiration of the Fourth (4th)
Lease Year, within the period which is the lesser of the time period estimated
by Landlord, plus such additional time, if any, that Landlord was delayed in
completing the repair or restoration for reasons beyond Landlord's control or
Two Hundred Seventy (270) days from the date of such damage (the "Short Lease
Maximum Repair Period"), and (b) in the case where the Term of this Lease has
been extended beyond the expiration of the Fourth (4th) Lease Year, within the
time period estimated by Landlord, plus ninety (90) days, plus such additional
time (not to exceed an additional ninety (90) days), if any, that Landlord was
delayed in completing the repair or restoration for reasons beyond Landlord's
control (said time period as estimated by Landlord plus such extensions thereof
[not in the aggregate exceeding 180 days] is herein called the "Maximum Repair
Period"), Tenant may terminate this Lease by written notice to the Landlord not
later than ten (10) days after the end of the Short Lease Maximum Repair Period
or Maximum Repair Period, as applicable, time being of the essence.
Notwithstanding anything to the contrary herein set forth, Landlord shall have
no duty pursuant to this Section 14: (a) to repair or restore any of Tenant's
office furniture, trade fixtures, office equipment, merchandise or any other
items of Tenant's property in the Premises or the Building, (b) to repair or
restore any portion of the alterations, additions or improvements made by or on
behalf of Tenant in the Premises (except for the leasehold improvements made
pursuant to the Workletter and any additional workletters or other agreements
pursuant to which improvements are made in the Premises and which Landlord has
agreed to insure pursuant to Section 19(d) of this Lease), unless Tenant shall
have prior to such loss or damage requested Landlord in a written notice to
increase the insurance coverage under Section 19(d) of this Lease to cover such
alterations, additions or improvements and shall have paid any additional
premium on account thereof in the same manner as provided in Section 19(d), (c)
to expend for any repair or restoration amounts in excess of insurance proceeds
paid to Landlord and available for repair or restoration, provided, that Tenant
shall have the option to terminate this Lease if either (i) Landlord elects
pursuant to this clause (c) not to undertake repair or restoration, or (ii)
Landlord shall at any time thereafter advise Tenant that there will be
insufficient insurance proceeds paid to Landlord and available for repair or
restoration, by giving notice to Landlord within thirty (30) after receipt from
Landlord of notice of such election, and if such option is so exercised, this
Lease shall terminate as of the date of such notice, and (d) if such damage
renders all or substantially all of the Premises or the Building untenantable or
inaccessible during the last three hundred sixty-five (365) days of the Term (or
last Two Hundred
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Seventy (270) days of the Term, in the event the Term of this Lease has not been
extended beyond the expiration of the Fourth (4th) Lease Year, then either
Landlord or Tenant (but as to Tenant, only if a material portion of the Premises
is rendered untenantable or inaccessible) shall have the option to terminate
this Lease as of the date of damage by written notice to the other party within
thirty (30) days after receipt of notice of the estimated number of days to
repair and restore the damage to the Building and/or the Premises, as the case
may be.
If this Lease shall not be terminated pursuant to the foregoing provisions
of this Section 14 by reason of any such casualty, then Rent shall abate as to
the entire Premises if a substantial portion has been damaged, and Tenant cannot
and does not occupy the Premises on account thereof, and as to the damaged
portion (plus any portion of the Premises rendered untenantable even though not
physically damaged by such casualty) of the Premises if less than a substantial
portion has been damaged, and Tenant cannot and does not occupy such portion of
the Premises on account thereof, during the period beginning with the date of
such damage and ending with the date when Landlord tenders the Premises or the
entire portion thereof which was untenantable to Tenant as being ready for
occupancy, or ready for Tenant to complete any work for which Tenant is
responsible, as the case may be. Such abatement shall be in an amount bearing
the same ratio to the total amount of Rent for such period as the portion of the
Premises which are untenantable bears to the entire Premises. In the event of
termination of this Lease pursuant to this Section 14, Rent shall be apportioned
on a per diem basis and be paid to the date of the fire or casualty.
As used in this Section 14, the phrase "substantial portion" shall mean an
area equal to fifty percent (50%) or more of the Rentable Area of the Premises
or the Building, as the case may be, as to which the determination of
substantial portion is being made. The word "untenantable" as used in this
Section 14 with reference to the Premises shall be deemed to include not only
those areas of the Premises which are not physically fit for occupancy, but also
those areas of the Premises which although not physically damaged are by reason
of the damage to other areas of the Premises or Building not reasonably suitable
for the operation of Tenant's business, so that if by reason of substantial or
material physical damage to the Premises Tenant cannot reasonably operate its
business therein and on account thereof actually shall vacate the Premises in
their entirety, then the Premises shall be deemed untenantable. Notwithstanding
anything in this Section 14 or elsewhere in this Lease to the contrary, in no
event shall the Premises or any part thereof be deemed to be untenantable so
long as Tenant shall be occupying the same for the conduct of its business
therein.
15. Eminent Domain. If all or a substantial part of the Building, or any
part thereof which includes all or a substantial part of the Premises, shall be
taken or condemned by any competent authority for any public or quasi-public use
or purpose, the Term of this Lease shall end upon and not before the date when
the possession of the part so taken shall be required for such use or purpose,
and without apportionment of the award to or for the benefit of Tenant. If the
portion of the Building or Premises which is taken or condemned shall result in
Tenant's loss of reasonable access to the Premises or shall render the balance
of the Premises unsuitable for the conduct of Tenant's business, Tenant may, at
its option, cancel this Lease upon thirty (30) days' prior written notice to
Landlord, effective as of the date of such taking by the condemning authority.
If any condemnation proceeding shall take or damage any part of the Building or
the Land, the taking of which would, in Landlord's opinion, prevent the
economical operation of the
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Building, or if the grade of any street, or alley adjacent to the Building is
changed by any competent authority, and such taking, damage or change of grade
makes it necessary to remodel the Building to conform to the taking, damage or
changed grade, Landlord shall have the right to terminate this Lease upon not
less than thirty (30) days' notice prior to the date of termination designated
in the notice. If Landlord or Tenant do not elect to terminate this Lease
following a partial taking, Landlord shall restore the remaining portion of the
Building or the Premises, as the case may be, to a reasonable architectural
whole, and Rent on such portion of the Premises affected by the restoration
(together with any other portion made untenantable as a result of such
restoration) shall abate until the completion of such restoration. The word
"untenantable" as used in this Section 15 with reference to the Premises shall
be deemed to include not only those areas of the Premises which are not
physically fit for occupancy, but also those areas of the Premises which
although not physically affected by Landlord's restoration, are by reason of the
condemnation of other areas of the Premises or the Building not reasonably
suitable for the operation of Tenant's business; provided, however, that in no
event shall the Premises or any part thereof be deemed to be untenantable
hereunder so long as Tenant shall be occupying the same for the conduct of its
business therein. In any of the events above referred to, Rent at the then
current rate shall be apportioned as of the date of the termination. No money or
other consideration shall be payable by the Landlord to the Tenant for the right
of termination, and the Tenant shall have no right to share in the condemnation
award, whether for a partial or total taking, or in any judgment for damages
caused by the change of grade. Notwithstanding anything to the contrary
contained in this Section 15, Tenant shall have the right if and to the extent
allowed by law or in equity, except as limited hereinafter, to pursue a separate
action against the condemning authority for any award which may be available
under law separately to Tenant for Tenant's moving and relocation expenses,
unamortized improvements (including furnishings) made and paid for solely by
Tenant, and other expenses or cost of Tenant reasonably related to such taking
or condemnation; provided, however, it is specifically acknowledged and agreed
that no such separate action by Tenant or separate award shall diminish,
directly or indirectly or in any other respect, the award or recovery to which
Landlord would otherwise be entitled in the absence of any such separate action
by Tenant, and if such separate action will have such effect (of limiting or
reducing Landlord's award in any respect), then Tenant shall not have the right
to prosecute the same. If the use or occupancy of the whole or any substantial
portion of the Building or the Premises is temporarily taken for a public or
quasi public use and such temporary taking shall continue for a period in excess
of (a) one hundred eighty (180) consecutive calendar days if the Term of this
Lease shall not have been extended beyond the expiration of the Fourth (4th)
Lease Year, or (b) three hundred sixty-five (365) consecutive calendar days if
the Term of this Lease shall have been extended beyond the expiration of the
Fourth (4th) Lease Year, then, Tenant shall have the option of terminating this
Lease upon not less than thirty (30) days' prior written notice to Landlord,
unless Landlord shall make the Premises available within such thirty (30) day
notice period. During any such temporary taking, Rent hereunder shall be
equitably reduced consistent with the other provisions of this Section 15
applicable to permanent takings.
16. Default; Landlord's Rights and Remedies.
(a) The occurrence of any one or more of the following matters
constitutes a Default by Tenant under this Lease:
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(i) Failure by Tenant to pay Rent, or any installment thereof,
within ten (10) calendar days after written notice of such failure to
pay the same on the due date; provided, however, that once Landlord
has given Tenant two (2) such notices during any twelve (12) month
period, Landlord shall not be required to give further written notice,
and thereafter the failure or refusal by Tenant to timely make any
payment of Rent when due within the following twelve (12) months shall
be a Default without further notice;
(ii) Failure by Tenant to pay, within ten (10) calendar days
after written notice thereof from Landlord to Tenant, any other moneys
due and payable from Tenant under this Lease, including amounts
payable under the Workletter attached hereto;
(iii) Failure by Tenant to cure promptly under the circumstances
after telephonic notice (followed by written notice) from Landlord,
any emergency condition posing imminent danger to property or injury
to persons, which emergency condition Tenant has created in violation
of law or of this Lease or which Tenant is otherwise obligated to
repair or remedy as provided in this Lease;
(iv) Failure by Tenant to observe or perform any other
covenant, agreement, condition or provision of this Lease (other than
item (v) below), if such failure shall continue for thirty (30) days
after written notice thereof from Landlord to Tenant; provided,
however, that with respect to matters which cannot reasonably be cured
within thirty (30) days Tenant shall not be in Default for an
additional reasonable period (but in no event more than an additional
ninety (90) days or one hundred twenty (120) days in the aggregate) to
cure the same so long as within such thirty (30) day period Tenant
commences such cure and diligently proceeds to complete the same at
all times thereafter;
(v) Failure by Tenant to observe any Special Parking Rules or
perform any of the other covenants and agreements respecting parking
pursuant to Section 5 (h) of this Lease, which shall continue for ten
(10) days after written notice of such failure; provided, however,
that once Landlord has given Tenant two (2) such notices during any
twelve (12) month period, Landlord shall not be required to give
further written notice, and thereafter the failure or refusal by
Tenant to comply with any such Special Parking Rules, covenants and
agreements within the following twelve (12) months shall be a Default
without further notice;
(vi) The levy upon, under execution or the attachment by legal
process, of the leasehold interest of Tenant, or the filing or
creation of a lien in respect of such leasehold interest, which levy,
attachment or lien shall not be released or discharged within sixty
(60) days from the date of such filing;
(vii) Tenant becomes insolvent or bankrupt or admits in writing
its
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inability to pay its debts as they mature, or makes an assignment for
the benefit of creditors, or applies for or consents to the
appointment of a trustee or receiver for the Tenant or for the major
part of this property;
(viii) A trustee or receiver is appointed for the Tenant or for
the major part of its property and is not discharged within ninety
(90) days after such appointment; or
(ix) Bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or other proceedings for relief under any
bankruptcy law, or similar law for the relief of debtors, are
instituted by or against the Tenant, and, if instituted against the
Tenant, are allowed against it or are consented to by it or are not
dismissed within ninety (90) days after such institution.
(x) Any violation by Tenant or others for whom Tenant is
responsible under Section 9 of this Lease of any of the rules and
regulations contained in Exhibit D attached to this Lease or other
Section of this Lease, or as may hereafter be reasonably adopted by
Landlord pursuant to Section 10(m) of this Lease, which violation is
not cured within the cure periods as set forth in item (iv) of this
Section 16(a), except as to any emergency condition posing imminent
danger to property or injury to persons as described in item (iii) of
this Section 16(a), which shall be cured within the cure periods set
forth in said item (iii), and except as provided in item (v) as to
violations of Special Parking Rules or covenants and agreements under
Section 5 (h) of this Lease, which shall be cured as provided in item
(v).
(b) If a Default occurs, Landlord shall have the rights and remedies
hereinafter set forth, which shall be distinct, separate and cumulative and
shall not operate to exclude or deprive the Landlord of any other right or
remedy allowed it by law:
(i) Landlord may terminate this Lease by giving to Tenant
notice of the Landlord's election to do so, in which event the Term of
this Lease shall end, and all right, title and interest of the Tenant
hereunder shall expire, on the date stated in such notice;
(ii) Landlord may terminate the right of the Tenant to
possession of the Premises without terminating this Lease by giving
notice to Tenant that Tenant's right of possession shall end on the
date stated in such notice, whereupon the right of the Tenant to
possession of the Premises or any part thereof shall cease on the date
stated in such notice; and
(iii) Landlord may enforce the provisions of this Lease
(including, without limitation, any rules and regulations contained in
Exhibit D or adopted pursuant to Section 10(m) or other Section of
this Lease) and may enforce and protect the rights of the Landlord
hereunder by a suit or suits in equity or at law for the specific
performance of any covenant or agreement contained herein, or for the
enforcement
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of any other appropriate legal or equitable remedy, including recovery
of all moneys due or to become due (subject to the provision of
subsection (e) below) from the Tenant under any of the provisions of
this Lease, including, without limitation, any damages, loss, costs
and expense resulting from any violation by Tenant or any of its
employees, agents or contractors of any of said rules and regulations.
(c) If Landlord exercises either of the remedies provided for in
subparagraphs (i) and (ii) of the foregoing Section 16(b), Tenant shall
surrender possession and vacate the Premises on the date stated in the
notice from Landlord to Tenant, and Tenant shall deliver possession thereof
to the Landlord, and Landlord may then or at any time thereafter re-enter
and take complete and peaceful possession of the Premises, with or without
process of law, and Landlord may remove all occupants and property
therefrom, using such force as may be allowed by law, without being deemed
in any manner guilty of trespass, eviction or forcible entry and detainer
and without relinquishing Landlord's right to Rent or any other right given
to Landlord hereunder or by operation of law.
(d) If Landlord terminates the right of the Tenant to possession of
the Premises without terminating this Lease, such termination of possession
shall not release Tenant, in whole or in part, from Tenant's obligation to
pay the Rent hereunder for the full Term. Landlord shall have the right,
from time to time, to recover from the Tenant, and the Tenant shall remain
liable for, all Rent, including, without limitation, all Base Rent,
Additional Rent and any other sums thereafter accruing as they become due
under this Lease during the period from the date of termination of
possession stated in such notice to the stated end of the Term, as well as
for any Rent accrued and unpaid for any period prior to the date of
termination of possession. In any such case, the Landlord may elect to
relet the Premises or any part thereof for the account of the Tenant for
such rent, for such time (which may be for a term extending beyond the Term
of this Lease) and upon such terms as the Landlord in Landlord's sole
discretion shall determine, and the Landlord shall not be required to
accept any tenant offered by the Tenant or to observe any instructions
given by the Tenant relative to such reletting. Also in any such case the
Landlord may make repairs, alterations and additions in or to the Premises
and redecorate the same to the extent deemed by the Landlord necessary and
in connection therewith change the locks to the Premises, and the Tenant
shall upon demand pay the reasonable cost thereof together with the
Landlord's reasonable out-of-pocket expenses of reletting (collectively,
the "Reletting Costs"). All Reletting Costs shall be prorated for the
applicable term thereof so that Tenant shall only be responsible for that
portion of the total Reletting Costs applicable to the period prior to the
Expiration Date of the Term. Landlord may collect the Rents from any such
reletting and apply the same first to the payment of the Reletting Costs
and second to the payment of Rent herein provided to be paid by the Tenant,
and any excess or residue shall operate only as an offsetting credit
against the amount of Rent as the same thereafter becomes due and payable
hereunder, but the use of such off setting credit to reduce the amount of
Rent due Landlord, if any, shall not be deemed to give Tenant any right,
title or interest in or to such excess or residue and any such excess or
residue shall belong to Landlord solely; provided that in no event shall
Tenant be entitled to a credit on its indebtedness to Landlord in excess of
the aggregate sum (including Base Rent and Additional Rent) which would
have been paid by Tenant for the
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period for which the credit to Tenant is being determined, had no Default
occurred. No such re-entry or repossession, repairs, alterations and
additions, or reletting shall be construed as an election on Landlord's
part to terminate this Lease unless a written notice of such intention be
given to Tenant or shall operate to release the Tenant in whole or in part
from any of the Tenant's obligations hereunder, and the Landlord may, at
any time and from time to time, sue and recover judgment for any
deficiencies from time to time remaining after the application from time to
time of the proceeds of any such reletting.
(e) In the event of the termination of this Lease by Landlord as
provided for by subparagraph (i) of Section 16(b) Landlord shall be
entitled to recover from Tenant all the fixed dollar amounts of rentals
accrued and unpaid for the period up to and including such termination
date, as well as all other additional sums payable by the Tenant, or for
which Tenant is liable or in respect of which Tenant has agreed to
indemnify Landlord under any of the provisions of this Lease, which may be
then owing and unpaid, and all actual costs and expenses, including court
costs and reasonable attorneys' fees incurred by Landlord in the
enforcement of its rights and remedies hereunder, and, in addition,
Landlord shall be entitled to recover as damages for loss of the bargain
and not as a penalty (x) the aggregate amount which at the time of such
termination represents the excess, if any, of (i) the present value of the
aggregate Rent at the annual rates for the remainder of the Term as then in
effect pursuant to the applicable provisions of Sections 1 and 2 (in the
case of Additional Rent as reasonably projected for the remainder of the
Term) of this Lease, over (ii) the then present value of the then aggregate
fair rental value of the Premises for the balance of the Term taking into
account operating expenses and taxes (as reasonably projected for the
remainder of the Term) and after deducting therefrom (A) the anticipated
cost of tenant improvements and of redecorating, repairs, alterations and
additions of and to the existing tenant improvements deemed by Landlord to
be necessary or desirable in order to relet the Premises at its fair rental
value, and (B) other reasonable expenses of reletting in amounts
theretofore incurred, if any, and reasonably anticipated to be incurred
thereafter, such present value to be computed in each case on the basis of
a per annum discount at the then current yield on U.S. Government Treasury
Bills or other direct obligations of the U.S. Government having a maturity
date closest to the last day of the Term, from the respective dates upon
which such rentals would have been payable hereunder had this Lease not
been terminated, and (y) any (without duplication of any other damages
under this Section 16) direct damages in addition thereto, including
reasonable attorneys' fees and court costs, which Landlord shall have
sustained by reason of the breach of any of the covenants of this Lease
other than the payment of Rent.
(f) All property removed from the Premises by Landlord pursuant to
any provisions of this Lease or of law may be handled, removed or stored by
the Landlord at the cost and expense of the Tenant, and the Landlord shall
in no event be responsible for the value, preservation or safekeeping
thereof. Tenant shall pay Landlord for all reasonable expenses incurred by
Landlord in such removal and storage charges against such property so long
as the same shall be in Landlord's possession or under Landlord's control.
All property not removed from the Premises or retaken from storage by
Tenant within thirty (30) days after the end of the Term, however
terminated, shall be conclusively deemed to have
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been conveyed by Tenant to Landlord as by bill of sale without further
payment or credit by Landlord to Tenant.
(g) Tenant shall pay all of Landlord's reasonable costs, charges and
expenses, including court costs and attorney's fees, incurred in
successfully enforcing Tenant's obligations under this Lease or incurred by
Landlord in any litigation, negotiation or transactions with third parties
in which Tenant causes the Landlord, without Landlord's fault, to become
involved or concerned. Landlord shall pay all of Tenant's costs, charges
and expenses, including court costs and reasonable attorney's fees,
incurred in successfully enforcing Landlord's obligations under this Lease
or incurred by Tenant in any litigation, negotiation or transactions
(except in respect to estoppel certificates under Section 21 and
subordination documents under Section 17, as required by this Lease) in
which Landlord causes the Tenant, without Tenant's fault, to become
involved or concerned, including, but not limited to, litigation with
respect to the Declaration which is without Tenant's fault.
17. Subordination. Landlord has heretofore and may hereafter from time to
time execute and deliver a first mortgage or first trust deed in the nature of a
mortgage, both referred to herein as "First Mortgage," against the Land and
Building, or any interest therein, and may sell and lease back the Land. In
addition, Landlord has and may hereafter from time to time execute and deliver
one or more mortgages or deeds of trust junior to the First Mortgage or may
subordinate the lien of a First Mortgage to another mortgage or deed of trust,
collectively referred to herein as "Second Mortgage." The First Mortgage and
Second Mortgage are herein collectively called "Mortgage." If requested by the
mortgagee or trustee under any Mortgage, or the lessor of any ground or
underlying lease ("ground lessor"), Tenant will either (a) subordinate its
interest in this Lease to said Mortgage, and to any and all advances made
thereunder and to the interest thereon, and to all renewals, replacements,
supplements, amendments, modifications and extensions thereof, or to said ground
or underlying lease, or to both, or (b) make Tenant's interest in this Lease
superior thereto; and Tenant will promptly execute and deliver such agreement or
agreements as may be reasonably required by such mortgagee or trustee under any
Mortgage.
Notwithstanding any of the foregoing, Tenant shall not be obligated to
subordinate its interest in this Lease pursuant to any of the foregoing
provisions unless the mortgagee or ground lessor requesting such subordination
executes a non-disturbance agreement providing that if there is a foreclosure of
such Mortgage or ground lease and no Default then exists (a) such mortgagee or
ground lessor will not make Tenant a party defendant to such foreclosure or
termination nor in any other way foreclose Tenant from its rights, evict Tenant,
disturb Tenant's possession under this Lease, or terminate or disturb Tenant's
leasehold estate or rights hereunder, subject, however, to the terms of this
Lease, and (b) this Lease shall continue as a direct lease between mortgagee or
ground lessor and Tenant (any such agreement, or any agreement of similar
import, from the mortgagee or ground lessor being hereinafter called a "Non-
Disturbance Agreement"), provided that such Non-Disturbance Agreement may
contain such other terms and conditions as are contained in the customary form
of Non-Disturbance Agreement of any such mortgagee or ground lessor, as the case
may be (provided that such other terms and conditions in such customary form
will not adversely change the rights and obligations of Tenant under this
Lease), and Tenant may be required to execute such Non-Disturbance Agreement
prior to its execution by the mortgagee or ground lessor, as the
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case may be. Following Tenant's execution and delivery of this Lease, and as a
condition thereof, Landlord shall obtain a Non-Disturbance Agreement (which
shall include an approval of this Lease) from the mortgagee of the existing
Mortgages on the Real Estate. If Landlord shall be unable to obtain a Non-
Disturbance Agreement from said mortgagee by July 31, 1999, then Tenant may
cancel this Lease by notice in writing delivered to Landlord not later than
August 6, 1999 (but not in any event after delivery of the Non-Disturbance
Agreement), time being of the essence. If Tenant shall give a timely notice of
cancellation, this Lease shall terminate, Landlord shall return any Security
Deposit theretofore paid and the parties shall have no further rights against
each other under this Lease. If Tenant shall fail to give a timely notice of
cancellation or shall not have a right to give such notice, this condition shall
be deemed waived, and this Lease shall remain in full force and effect in
accordance with its terms. Landlord represents that South Charles Investment
Corporation, a Georgia corporation, is the holder of the First Mortgage and the
Second Mortgage; and that there are neither any other holders of any Mortgage
nor any existing ground lessors.
It is further agreed that (a) if any Mortgage shall be foreclosed, or if
any ground or underlying lease be terminated, (i) the liability of the mortgagee
or trustee hereunder or purchaser at such foreclosure sale or the liability of a
subsequent owner designated as Landlord under this Lease shall exist only so
long as such trustee, mortgagee, purchaser or owner is the owner of the Building
or Land and such liability shall not continue or survive after further transfer
of ownership except for obligations or liabilities incurred during such
ownership, provided that any transferee of such trustee, mortgagee, purchaser or
owner shall have assumed in writing all of the obligations of Landlord
hereunder; and (ii) upon request of the mortgagee or trustee, if the Mortgage
shall be foreclosed, Tenant will attorn, as Tenant under this Lease, to the
purchaser at any foreclosure sale under any Mortgage or upon request of the
ground lessor, if any ground or underlying lease shall be terminated, Tenant
will attorn as Tenant under this Lease to the ground lessor, and Tenant will
execute such instruments as may be necessary or appropriate to evidence such
attornment (provided that any such instruments shall not increase the cost or
expense to Tenant under this Lease or in any other way materially and adversely
change the rights and obligations of Tenant hereunder); and (b) this Lease may
not be modified or amended so as to reduce the Rent or shorten the Term or
modify any of the economic terms provided hereunder, or so as to adversely
affect in any other respect the rights of the Landlord, nor shall this Lease be
canceled or surrendered, other than as expressly permitted in this Lease,
without the prior written consent, in each instance, of the mortgagee or trustee
under any Mortgage and of any ground lessor.
Should any prospective mortgagee or ground lessor require a modification or
modifications of this Lease, which modification or modifications will not
increase the cost or expense to Tenant under this Lease or in any other way
adversely change the rights and obligations of Tenant hereunder, then, in such
event, Tenant agrees that this Lease may be so modified and agrees to promptly
execute whatever documents are required therefor and deliver same to Landlord
within ten (10) business days following the request therefor.
If Tenant fails, within ten (10) business days after written demand
therefor, to execute and deliver any instruments, which comply with the
provisions of this Section, as may be necessary or proper to effectuate any of
the covenants of Tenant set forth in this Section 17, and such failure shall
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continue for five (5) calendar days following written notice to Tenant of such
failure, such failure shall be deemed a Default under this Lease.
18. Mortgagee Protection. Tenant agrees to give any holder of any
Mortgage (as defined in Section 17 of this Lease), by registered or certified
mail concurrently with the giving of notice to Landlord, a copy of any notice of
default served upon the Landlord by Tenant, provided that prior to such notice
Tenant has been notified in writing (by way of service on Tenant of a copy of
Assignment of Rents and Leases, or otherwise) of the name and address of such
Mortgage holder, and Tenant will accept any cure of such default by such holder
of any Mortgage. Tenant further agrees that if Landlord shall have failed to
cure or correct such default within thirty (30) days after such notice to both
Landlord and all of such holder(s) of any Mortgage(s) (or if such default cannot
be cured or corrected within that time, then such additional time as may be
necessary if Landlord has commenced within such period permitted Landlord and
is diligently pursuing the remedies or steps necessary to cure or correct such
default), then Tenant may give notice of such failure to such holders of any
Mortgage(s) and such holders of any Mortgage(s) shall have thirty (30) days
after such notice (or if such default cannot be cured or corrected within that
time, then such time as may be necessary if such holders of any Mortgage(s) have
commenced within such period and are diligently pursuing the remedies or steps
necessary to cure or correct such default, including, without limitation,
obtaining possession of the Land and Building). Until the time allowed, as
aforesaid, for Landlord and the holder(s) of any Mortgage(s) to cure such
default has expired without cure, Tenant shall have no right to, and shall not,
exercise any right it may have to terminate this Lease on account of Landlord's
default.
19. Subrogation and Insurance.
(a) Landlord and Tenant agree to have all fire and extended coverage
and material damage insurance which may be carried by either of them
endorsed with a clause providing that any release from liability of or
waiver of claim for recovery from the other party entered into in writing
by the insured thereunder prior to any loss or damage shall not affect the
validity of said policy or the right of the insured to recover thereunder.
Without limiting any release or waiver of liability or recovery contained
in any other Section of this Lease but rather in confirmation and
furtherance thereof, each of the parties hereto waives all claims for
recovery from the other party for any loss or damage to any of its property
that is either insured under valid and collectible insurance policies or
for which insurance is required to be maintained under this Lease by the
releasing party. For purposes of the waiver described in this subsection
(a), any applicable deductible amounts under Landlord's or Tenant's
policies shall be treated as though covered under valid and collectible
insurance policies.
Notwithstanding the foregoing or anything contained in this Lease to
the contrary, any release or any waiver of claim shall not be operative,
nor shall the foregoing endorsement be required, in any case where the
effect of such release or waiver is to invalidate insurance coverage or the
right of the insured to recover thereunder or increase the cost thereof in
excess of commercially reasonable amounts (provided that in the case of
increased cost the other party shall have the right, within ten (10) days
following written notice, to pay such increased cost keeping such release
or waiver in full force and effect).
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As soon as a party becomes aware that a waiver of subrogation will not be
available, would invalidate its insurance coverage or would increase the
costs thereof in excess of commercially reasonable amounts, it shall
promptly notify the other party as to the applicable situation.
(b) Tenant shall carry insurance during the entire Term of this Lease
insuring Tenant and Landlord and others as set forth below with terms,
coverages and in companies reasonably satisfactory to Landlord and with
such increases in limits as Landlord may from time to time reasonably
request , but initially Tenant shall maintain the following coverages in
the following amounts:
(i) Comprehensive general public liability insurance (including
a contractual liability insurance endorsement) in an amount not less
than $5,000,000 combined single limit per occurrence, covering Tenant
as named insured and Landlord, its Members, and the managing and
leasing agents for the Building, and the respective members, partners,
shareholders, directors, officers, agents and employees of each of the
foregoing, any mortgagees under any Mortgage(s) and such other persons
as Landlord may designate as additional insureds.
(ii) Insurance against fire, sprinkler leakage, vandalism, and
the extended coverage perils for the full replacement cost of all
office furniture, trade fixtures, office equipment, merchandise and
all other items of Tenant's property in the Premises or in the
Building.
Tenant shall, prior to the commencement of and from time to time
during the Term, furnish to Landlord certificates evidencing such coverage,
which certificates shall state that such insurance coverage may not be
changed, canceled or not renewed without at least thirty (30) days' prior
written notice to Landlord and Tenant (ten (10) days for cancellation due
to non-payment of premiums).
Landlord agrees that Tenant may provide any insurance required by
items (i) and (ii) above by so-called blanket policies and/or smaller
underlying limits with so-called umbrella or excess liability policies
together aggregating the required levels of insurance coverage.
(c) Tenant shall not directly or indirectly make any use of the
Premises which may thereby be prohibited or be dangerous to person or
property or which may jeopardize any insurance coverage, or may increase
the cost of insurance or require additional insurance coverage.
(d) Landlord shall maintain (i) commercial general liability
insurance (including a contractual liability insurance endorsement) in an
amount not less than amounts generally carried by prudent owners of similar
first class office buildings in the Applicable Market Area from time to
time, and (ii) all-risk property insurance coverage on (A) the shell and
core of the Building, and (B) Tenant Work made pursuant to the Workletter
and any other leasehold improvements with respect to which Tenant has
requested Landlord to increase the
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insurance coverage pursuant to this Section 19(d) in an amount necessary to
avoid any coinsurance provisions and in an amount and with terms as would
customarily be carried by prudent owners of similar first class office
buildings in the Applicable Market Area from time to time or as otherwise
required by any holder of a Mortgage. The cost of all such insurance shall
be an Expense of the Building, except for the casualty coverage as provided
in (ii)(B) above as to which Tenant agrees to pay the portion of the
insurance premium applicable to Tenant's leasehold improvements as
aforesaid within ten (10) days after Landlord's submission of an invoice
for same.
Tenant agrees that Landlord may provide any insurance required under
this subsection (d) by so-called blanket policies and/or smaller underlying
limits with so-called umbrella or excess liability policies together
aggregating the required levels of insurance coverage.
20. Nonwaiver. No waiver of any condition expressed in this Lease shall be
implied by any neglect of Landlord or Tenant to enforce any remedy on account of
the violation of such condition whether or not such violation be continued or
repeated subsequently, and no express waiver shall affect any condition other
than the one specified in such waiver and that one only for the time and in the
manner specifically stated. It is agreed that no receipt of moneys by Landlord
from Tenant after the termination in any way of the Term or of Tenant's right of
possession hereunder or after the giving of any notice shall reinstate, continue
or extend the Term or affect any notice given to Tenant prior to the receipt of
such moneys. It is also agreed that after the service of notice or the
commencement of a suit or after final judgment for possession of the Premises,
Landlord may receive and collect any moneys due, and the payment of said moneys
shall not waive or affect said notice, suit or judgment.
21. Estoppel Certificate. Tenant agrees that from time to time upon not
less than ten (10) business days' prior written request by Landlord or the
holder of any Mortgage or any ground lessor, Tenant (or, if Landlord shall
request, any permitted assignee, subtenant, licensee, concessionaire or other
occupant of the Premises claiming by, through or under Tenant) will deliver to
Landlord and/or to the holder of any Mortgage or ground lessor, as the case may
be, a statement in writing signed by the certifying party certifying to the
extent the following is true (a) that this Lease is unmodified and in full force
and effect (or if there have been modifications, that this Lease as modified is
in full force and effect and identifying the modifications); (b) the date upon
which Tenant began paying Rent, the dates to which the Rent and other charges
have been paid and the dates upon which the Term commenced and shall end; (c)
that, to the Tenant's knowledge the Landlord is not in default under any
provision of this Lease, or, if in default, the nature thereof in detail; (d)
that the Premises have been completed in accordance with the terms of this Lease
and Tenant is in occupancy thereof and paying Rent on a current basis with no
rental offsets or claims (or the nature of such offsets or claims in detail);
(e) that there has been no prepayment of Rent other than that provided for in
this Lease; (f) that there are no actions, whether voluntary or otherwise,
pending against the certifying party under the bankruptcy laws of the United
States or any State thereof, and (g) such other factual matters concerning the
Lease as may be reasonably required by the Landlord and/or holder of any
Mortgage or ground lessor, as the case may be. If Tenant fails, within said ten
(10) business day period, to complete, execute
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and deliver any instruments as may be required or necessary to effectuate the
covenants of Tenant set forth in this Section 21, and such failure shall
continue for five (5) calendar days following written notice to Tenant of such
failure, such failure shall be deemed to be a Default under the provisions of
Section 16 of this Lease.
Landlord agrees that from time to time upon not less than fifteen (15)
business days' prior written request by Tenant, Landlord will deliver to Tenant
a statement in writing signed by Landlord certifying to the extent the following
is true (a) that this Lease is unmodified and in full force and effect (or if
there have been modifications, that this Lease as modified is in full force and
effect, and identifying the modifications); (b) the date upon which Tenant began
paying Rent, the dates to which the Rent and other charges have been paid and
the dates upon which the Term commenced and shall end; and (c) that, to the
Landlord's knowledge the Tenant is not in default under any provisions of this
Lease, or, if in default, the nature thereof in detail.
22. Tenant-Corporation. Tenant (a) represents and warrants that this Lease
has been duly authorized, executed and delivered by and on behalf of the Tenant
and constitutes the valid and binding agreement of the Tenant in accordance with
the terms of this Lease, and (b) agrees that Tenant shall deliver to Landlord or
its agent, concurrently with the delivery of this Lease executed by Tenant,
either a certified resolution of the Board of Directors authorizing this Lease
or an opinion of Tenant's counsel, in form and substance acceptable to
Landlord's counsel, which opines that (i) the execution and delivery of this
Lease is duly authorized, (ii) this Lease is executed by individuals duly
authorized to take such action on behalf of Tenant and (iii) this Lease is a
binding obligation of Tenant.
23. Real Estate Brokers. Each party represents to the other that it has
directly dealt with and only with Williams Real Estate Co. of Illinois, L.L.C.,
d/b/a GVA Williams ("Broker") (whose commissions shall be paid by Landlord
pursuant to separate agreement) as broker in connection with the effectuation,
negotiation and execution of this Lease, and each party agrees to indemnify and
hold the other harmless from all damages, liability and expense (including
reasonable attorneys' fees) arising from any claims or demands of any other
broker or brokers or finders for any commissions or fees alleged to be due such
broker or brokers or finders in connection with its participating with the
indemnifying party in the effectuation, negotiation and execution of this Lease
in violation of such party's representation aforesaid.
24. Notices. In every instance where it shall be necessary or desirable
for Landlord to serve a written notice or demand upon Tenant, it shall be
sufficient (a) to deliver by messenger or cause to be delivered to Tenant by
messenger a written or printed copy of such notice or demand, or (b) to send a
written or printed copy of such notice or demand by United States registered or
certified mail, postage prepaid, return receipt requested, addressed to Tenant
at the Premises, Attention: Gregory K. Jones, President and CEO, with a copy in
each case to Winston & Strawn, 35 West Wacker Drive, Chicago, Illinois 60601-
9703, Attention: Mark Heatwole, Esq., in which event the notice or demand shall
be deemed to have been served on the date received. In every instance where it
shall be necessary or desirable for Tenant to serve a written notice or demand
upon Landlord, it shall be sufficient to deliver by messenger or cause to be
delivered to Landlord by messenger a written or printed copy of such notice or
demand, or (b) to
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send a written or printed copy of such notice or demand by United States
registered or certified mail, postage prepaid, return receipt requested,
addressed to Landlord c/o GVA Williams Real Estate, 55 East Monroe Street, Suite
3850, Chicago, Illinois 60603, Attention: Lawrence A. Debb or Rand Diamond, with
a copy to The Law Offices of Richard S. Rosenstein, 135 South LaSalle Street,
Suite 3600, Chicago, Illinois 60603, Attention: Richard S. Rosenstein, Esq.
Communications to Landlord shall be deemed to have been served on the date
received. Unless otherwise specifically set forth in the Lease, all demands
and/or notices shall be in writing.
25. Miscellaneous.
(a) Each provision of this Lease shall extend to and shall bind and
inure to the benefit not only of Landlord and Tenant, but also their
respective heirs, legal representatives, successors and assigns, but this
provision shall not operate to permit any transfer, assignment, mortgage,
encumbrance, lien, charge, or subletting contrary to the provisions of
Section 12.
(b) All of the agreements of Landlord and Tenant with respect to the
Premises are contained in this Lease; and no modification, waiver or
amendment of this Lease or of any of its conditions or provisions shall be
binding upon Landlord unless in writing signed by Landlord and Tenant.
(c) Submission of this instrument for examination shall not
constitute a reservation of or option of the Premises or in any manner bind
Landlord and no lease or obligation on Landlord shall arise until this
instrument is signed and delivered by Landlord and Tenant; provided,
however, the execution and delivery by Tenant of this Lease to Landlord or
the agent of Landlord shall constitute an offer by Tenant to lease the
Premises on the terms and conditions herein contained, which offer may not
be revoked until August 6, 1999.
(d) The word "Tenant" whenever used herein shall be construed to mean
Tenants or any one or more of them in all cases where there is more than
one Tenant; and the necessary grammatical changes required to make the
provisions of this Lease apply either to corporations or other
organizations, partnerships or other entities, or individuals, shall in all
cases be assumed as though in each case fully expressed.
(e) The headings of Sections are for convenience only and do not
limit, expand or construe the contents of the Sections. Unless otherwise
specifically stated, all references to "Sections" or "subsections" shall
mean Sections or subsections of this Lease. The term "hereof" shall mean
this Lease and not a particular Section of this Lease.
(f) The Landlord's title is and always shall be paramount to the
title of Tenant, and nothing in this Lease contained shall empower Tenant
to do any act which can, shall or may encumber the title of Landlord or
enable Tenant to deny the title of Landlord.
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(g) The parties specifically acknowledge and agree that time is of
the essence of this Lease and of each and all provisions of this Lease.
(h) All amounts (including, without limitation, Base Rent and
Additional Rent) owed by Tenant to Landlord pursuant to any provision of
this Lease shall bear interest at the annual rate of two percent (2%) in
excess of the corporate base rate from time to time in effect at LaSalle
National Bank, N.A., at Chicago, Illinois (the "Default Rate") from the
date due until paid, unless a lesser rate shall then be the maximum rate
permissible by law with respect thereto, in which event said lesser rate
shall be charged.
(i) The invalidity of any provision of this Lease shall not impair or
affect in any manner the validity, enforceability or effect of the rest of
this Lease.
(j) All understandings and agreements, oral or written, heretofore
made between the parties hereto are merged in this Lease, which alone fully
and completely expresses the agreement between Landlord and Tenant.
(k) In the event that this Lease shall be executed by more than one
person, firm, corporation or entity as Tenant, the obligations of said
persons, firms, corporations or entities shall be joint and several.
(l) Tenant shall comply with all applicable laws and ordinances, all
orders and decrees of court and all requirements of all governmental
authority with respect to Tenant's use, operation, maintenance and repair
of the Premises as required hereby. Provided, however, Tenant shall not be
required to make or pay for the making of any structural changes to the
Building or the Premises, unless such structural changes are required
because of the nature of any improvements installed by or on behalf of
Tenant or because of Tenant's particular use of the Premises, and would not
otherwise be applicable to the Building or the tenants in general, in which
case Tenant shall pay for the making of all such changes and otherwise pay
for all such compliance. Landlord shall comply with all laws, ordinances,
all orders and decrees of court and all requirements of all governmental
authority applicable to the Building (except to the extent required to be
complied with by Tenant), subject, however, to reimbursement to Landlord as
an Expense pursuant to the provisions of Section 2 hereof to the extent the
same shall constitute an Expense pursuant to said Section 2.
26. Landlord. The term "Landlord" as used in this Lease means only the
owner or owners at the time being of the Building and the Land so that in the
event of any assignment or sale, once or successively, of said Land and
Building, or any assignment of this Lease by Landlord, said Landlord named
herein shall be and hereby is entirely freed and relieved of all covenants and
obligations of Landlord hereunder accruing after such sale or assignment, and
Tenant agrees to look solely to such purchaser or assignee with respect thereto.
This Lease shall not be affected by any such assignment or sale, and Tenant
agrees to attorn to the purchaser or assignee.
27. Title and Covenant Against Liens. The Landlord's title is and always
shall be paramount to the title of the Tenant and nothing contained in this
Lease shall empower the Tenant
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* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
to do any act which can, shall or may encumber the title of the Landlord. Tenant
covenants and agrees not to suffer or permit any lien of mechanics or
materialmen to be placed upon or against the Land, the Building, or the Premises
or against the Tenant's leasehold interest in the Premises and, in case of any
such lien attaching, and subject to the last sentence of this Section 28, to
immediately pay and remove same. Tenant has no authority or power to cause or
permit any lien or encumbrance of any kind whatsoever, whether created by act of
Tenant, operation of law or otherwise, to attach to or be placed upon the Land,
Building or Premises, and any and all liens and encumbrances created by Tenant
shall attach only to Tenant's interest in the Premises. If any such liens so
attach and Tenant fails to either (x) pay and remove or (y) bond or insure over
same and contest the same as provided below within sixty (60) days after Tenant
has notice of said lien, Landlord, at its election, may pay and satisfy the same
without any obligation to investigate or determine the validity or merits of any
such lien and encumbrance and in such event the sums so paid by Landlord, with
interest from the date of payment at the rate set forth in Section 25(h) of this
Lease for amounts owed Landlord by Tenant, shall be deemed to be additional Rent
due and payable by Tenant at once without notice or demand. Notwithstanding the
foregoing prohibition against liens against the Premises, Tenant may in good
faith and with reasonable diligence contest the validity or amount of any such
lien and defer payment and discharge thereof during the pendency of such
contest, provided, however, that Tenant shall insure over such lien by a title
indemnity with a title company acceptable to Landlord (or, at Landlord's
election, bond over the same with a surety company acceptable to Landlord and in
a manner acceptable to Landlord), so as to assure payment thereof and interest
thereon and costs incurred or to be incurred with respect thereto, and to
prevent any foreclosure of the lien or sale of the Premises, Building or Land by
reason of non-payment, and in the event of such contest Tenant will not be
deemed to be in Default hereunder and Landlord will not have the right to pay
the lien so long as Tenant is so contesting in accordance with the provisions
aforesaid; provided further, however, that on final adverse determination of the
lien or claim for lien Tenant shall immediately pay any judgment rendered with
all costs and charges and have such lien released of record and any judgment
satisfied, failing which Landlord may pay the same and any cost as hereinabove
provided and/or also take such other actions for Tenant's failure as may be
provided in this Lease.
Nothing in this Lease shall prohibit Tenant from collaterally assigning its
personal property and trade fixtures only (but in no event any other property,
including, without limitation, any Installations [as defined in Section 7 of
this Lease]) in order to secure a loan from an institutional lender. In the
event that any institutional lender shall require as a condition of making any
such loan to Tenant secured by its personal property and trade fixtures that
Tenant obtain an agreement from Landlord concerning the rights and obligations
as between such lender and Landlord with respect thereto, Landlord agrees that
it will enter into an agreement with such lender in the form attached hereto as
Exhibit E; provided that such lender may be required to execute such agreement
prior to execution by Landlord.
28. Security Deposit. Tenant shall initially deposit with Landlord the sum
of * * * * * (the "Initial Security Deposit"), subject to decrease as provided
in this Section 28, upon Tenant's execution and delivery of this Lease
(provided, however, in the event that this Lease shall not be executed by
Landlord pursuant to Section 25 (c) of this Lease, or if this Lease shall be
cancelled
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by Tenant pursuant to Section 5 (h) (i) or Section 17, then such Security
Deposit shall be returned to Tenant within seven (7) days following any of such
events). In addition, in the event that Tenant shall exercise its Option to
Lease the Option Premises as provided in Section 32 hereof, Tenant shall
deposit, subject to decrease as provided in this Section 28, an additional
amount (the "Additional Security Deposit"; the Initial Security Deposit and the
Additional Security Deposit collectively constitute the "Security Deposit")
equal to the product of Ten and No/100 Dollars ($10.00) times the rentable area
of the Option Premise as finally determined.
So long as Tenant shall not be or have been in Default under this Lease as
of the first day of the Second (2nd) Lease Year, the amount of the Initial
Security Deposit shall be reduced by thirty-three percent (33%). So long as
Tenant shall not be or have been in Default under this Lease as of the first day
of the Third (3rd) Lease Year, the amount of the Initial Security Deposit shall
be reduced by an additional thirty- three percent (33%) (that is, a total
reduction of 66%) and the Additional Security Deposit, if any, shall be reduced
by thirty-three percent (33%). So long as Tenant shall not be or have been in
Default under this Lease as of the first day of the Fourth (4th) Lease Year, if
applicable, the Initial Security Deposit shall be reduced to zero and the
Additional Security Deposit shall be reduced by an additional thirty-three
percent (33%) (that is, a total reduction of 66%).
The Security Deposit shall serve as security for the prompt, full and
faithful performance by Tenant of all of the terms and provisions of this Lease.
In the event that Tenant is in default hereunder and fails to cure within any
applicable time permitted under this Lease, or in the event that Tenant owes any
amounts to Landlord upon the expiration of this Lease, Landlord may, from time
to time, use or apply the whole or any part of the Security Deposit for the
payment of Tenant's obligations hereunder. The use or application of the
Security Deposit or any portion thereof shall not prevent Landlord from
exercising any other right or remedy provided hereunder or under any law and
shall not be construed as liquidated damages. In the event the Security Deposit
is reduced by such use or application, Tenant shall deposit with Landlord within
ten (10) days after written notice, an amount sufficient to restore the full
amount of the Security Deposit. Landlord shall not be required to keep the
Security Deposit separate from Landlord's general funds or pay interest on the
Security Deposit. Any remaining portion of the Security Deposit shall be
returned to Tenant within sixty (60) days after Tenant has vacated the Premises
in accordance with Section 7 of this Lease. If the Premises shall be expanded at
any time, or if the Term shall be extended at an increased rate of Rent, the
Security Deposit shall thereupon be proportionately increased.
At Tenant's election, the Security Deposit shall be in the form of an
unconditional, irrevocable letter of credit (the "Letter of Credit"), which
Letter of Credit shall (i) be in form and substance satisfactory to Landlord,
(ii) name Landlord, or such person or entity which Landlord may from time to
time designate, as the beneficiary under the Letter of Credit, (iii)
specifically allow Landlord to draw upon it at any time and from time to time by
delivering to the issuer of the Letter of Credit written notice that Landlord is
entitled to draw thereunder pursuant to the terms of this Lease, (iv) expire no
earlier than ninety (90) days after the Expiration Date, and (v) be issued FDIC-
insured financial institution located in the City of Chicago satisfactory to
Landlord in its sole discretion. The Letter of Credit shall have an expiration
date no earlier than one (1) year after the date of issue, and Tenant agrees to
cause the issuer of the Letter of Credit to renew the Letter of
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Credit, from time to time until such time as this Lease expires, at least
seventy-five (75) days prior to the expiration of the Letter of Credit upon the
same terms and conditions. If the Premises are conveyed by Landlord, Tenant upon
written request shall amend the Letter of Credit to change the beneficiary
thereunder to the successor Landlord. In the event Tenant defaults in the
performance of its obligations under this Lease to deliver, renew or replace the
Letter of Credit within the applicable time limits and as otherwise provided
herein, Landlord or its successor or assign, in addition to all rights and
remedies which Landlord may have under this Lease or at law, shall have the
right to present the Letter of Credit for payment and require the issuer of the
Letter of Credit to make payment to Landlord or its successor or assign the
entire amount represented by the Letter of Credit. Any proceeds obtained by
Landlord by presenting the Letter of Credit shall be held by Landlord as the
Security Deposit as provided in this Section 28.
29. No Recordation. Tenant shall not record this Lease or any memorandum
hereof. If Tenant shall do so in violation hereof, at the option of Landlord in
writing and not otherwise, Landlord may cancel this Lease.
30. Covenant of Quiet Enjoyment. Subject to the terms, conditions and
provisions of this Lease, so long as Tenant is not in Default, during the Term
of this Lease Tenant shall have the peaceful and quiet enjoyment of the Premises
without any hindrance or molestation by Landlord or any person or entity
claiming by, through or under Landlord.
31. Limitation of Liability. Tenant's sole recourse against Landlord,
and any successor to the interest of Landlord in the Premises, is to the
interest of Landlord, and any successor, in the Premises and the Building of
which the Premises are a part, it being agreed that no personal liability is
assumed by nor at any time may be asserted or enforced against Landlord or any
successor, all such personal liability, if any, being expressly waived and
released by Tenant. Tenant will not have any right to satisfy any judgment that
it may have against Landlord, or any successor, from any other assets of
Landlord, or any successor. In this paragraph the terms "Landlord" and
"successor" include the shareholders, venturers, members and partners of
"Landlord" and "successor" and the officers, directors, managers, agents and
employees of "Landlord" and "successor."
32. Option to Lease. Subject to prior lease by Tenant pursuant to the
provisions of Section 36 of this Lease, Tenant shall have the right to lease
certain additional Premises in the Building upon the following terms and
conditions:
(a) To the extent not previously leased by Tenant pursuant to the provisions of
Section 36 of this Lease, Tenant shall have the option hereinafter described
(the "Option to Lease") to lease not less than ten thousand (10,000) rentable
square feet nor more than twenty-five thousand rentable square feet (25, 000)
(plus or minus ten percent (10%) in each case at Landlord's sole discretion in
order to effect a reasonable leasing plan for the Building) on a floor of the
Building as Landlord shall designate at its sole discretion, and with a demising
configuration as Landlord shall designate in its reasonable discretion so as to
effect a commercially reasonable configuration for the benefit of Landlord and
Tenant (such space in the Building being referred to as the "Option Premises").
To the extent that Tenant shall lease Offered Premises pursuant to the
provisions of Section 36 of
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this Lease, the maximum rentable square footage of Option Premises shall be
reduced on a square foot by square foot basis so that, as an example only, if
Tenant shall lease 12,000 rentable square feet of Offered Premises, the maximum
area of the Option Premises would be reduced to 13,000 rentable square feet
(plus or minus ten percent (10%) at Landlord's sole discretion in order to
effect a reasonable leasing plan for the Building). The term for the lease of
the Option Premises (if timely elected and subject to the provisions of this
Section 32) shall commence as follows: If Tenant shall exercise the Option to
Lease on or before the day which is two hundred seventy (270) days following the
Commencement Date of the Term, but after the day which is one hundred thirty-
five (135) days after the Commencement Date of the Term, then the term for the
lease of the Option Premises shall commence on the earlier of (i) the first
(1st) day of the second (2nd) calendar month of the Second (2nd) Lease Year (the
"Projected Option Premises Commencement Date"), and (ii) such date as Tenant
shall occupy the Option Premises for the conduct of its business therein; and if
Tenant shall exercise the Option to Lease on or before the day which is one
hundred thirty-five (135) days following the Commencement Date of the Term, then
the term of the lease of the Option Premises shall commence on the earlier of
(i) the day which is two hundred ten (210) days following the Commencement Date
of the Term (the "Alternate Projected Option Premises Commencement Date"), and
(ii) such date as Tenant shall occupy the Option Premises for the conduct of its
business therein. In either case, the term of the lease of the Option Premises
shall end contemporaneously with the expiration of the Term, unless sooner
terminated as provided in this Lease, and subject to extension as provided in
Section 33 of this Lease. Upon the commencement of the term of the lease of the
Option Premises the Option Premises shall be deemed Premises for all purposes
under this Lease.
(b) The Option to Lease shall in all events be exercised by written
notice given by Tenant to Landlord not later than two hundred seventy (270)
days following the Commencement Date of the Term, time being of the
essence. Tenant's right to exercise the Option to Lease shall be
conditioned upon this Lease being in full force and effect, Tenant's right
to possession of the Premises not having been terminated and Tenant not
being in Default hereunder at the time of the exercise of the Option to
Lease; and the commencement of the term of the Option Premises and the
inclusion of the Option Premises in the Premises shall be conditioned upon
this Lease being in full force and effect, Tenant's right to possession of
the Premises not having been terminated and Tenant not being in Default
hereunder; provided, however, Landlord may at its option waive any of the
conditions set forth in this subsection (b).
(c) If Tenant shall timely and validly elect to lease the Option
Premises Landlord shall deliver possession thereof to Tenant with the
Option Premises Tenant Work (hereinafter defined) substantially complete on
or before the Projected Option Premises Commencement Date or the Alternate
Projected Option Premises Commencement Date, as the case may be. If
Landlord is unable to deliver the Option Premises to Tenant with the Option
Premises Tenant Work substantially complete on the Projected Option
Premises Commencement Date or the Alternate Proejcted Option Premises
Commencement Date, as the case may be, no such failure to deliver shall
affect the validity of this Lease or Tenant's obligations under this Lease
with respect to the then Premises or give rise to a right of Tenant to
terminate this Lease or to rescind its election to lease the Option
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* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
Premises, but the term of the lease of the Option Premises shall not
commence until the Option Premises Tenant Work shall be substantially
complete except in the case of any tenant delay as provided hereinafter,
and unless Tenant shall take possession of the Option Premises for the
conduct of its business therein as provided in item (ii) of subsection (a)
of this Section 32.
(d) Following exercise by Tenant of the Option to Lease and within
thirty (30) days following written request by either Landlord or Tenant,
Landlord and Tenant shall enter into a supplement to this Lease affirming
the terms, conditions and provisions applicable to the Option Premises,
including, without limitation, the designation and rentable area thereof,
but failure of either party to do so shall not affect the validity or
effectiveness of Tenant's exercise of its Option to Lease the Option
Premises.
(e) If Tenant shall timely exercise its Option to Lease the Option
Premises, then subject to the other provisions and conditions of this
Lease, the Option Premises shall be leased to Tenant upon the Rent and
other terms, covenants and conditions of this Lease and as specifically set
forth hereinafter:
(i) Subject to and in accordance with the provisions of Section
1 of this Lease, Tenant shall pay annual Base Rent (in addition to the
Base Rent being paid for other portions of the Premises) for and on
account of the Option Premises for each year or part thereof falling
within the term of the lease of the Option Premises in an amount equal
to the product of the number of rentable square feet in such Option
Premises as fully determined times the applicable rate per rentable
square foot from time to time applicable to the initial Premises as
provided in Section 1 of this Lease. The Monthly Base Rent shall be
one-twelfth (1/12) of the Annual Base Rent. Monthly Base Rent shall be
payable at the times and in the manner set forth in Section 1 of this
Lease. In the event that Tenant shall exercise the Extension Option
provided in Section 33 of this Lease, then for the Fourth (4th) Lease
Year Tenant shall in addition to Base Rent pay Additional Rent for and
on account of the lease of the Option Premises.
Tenant work for and with respect to the Option Premises ("Option Premises Tenant
Work") shall be constructed by Landlord in the Option Premises pursuant to and
in accordance with the provisions of a workletter substantially similar to the
Workletter, except for the modification of dates and plans and similar matters,
and except that the Landlord's cost for the construction of the Option Premises
Tenant Work shall be limited to an amount equal to the product of either (A) * *
* * * in the event that the Projected Option Premises Commencement Date is
applicable or (B) * * * * * in the event that the Alternate Projected Option
Premises Commencement Date is applicable, times the rentable area of the Option
Premises as finally determined.
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33. Option to Extend.
Tenant shall have the option (the "Extension Option") to extend the Term of
this Lease for one (1) Lease Year (the Fourth (4th) Lease Year of the Term),
subject to earlier termination as provided in this Lease, and subject to and
conditioned upon the following terms and conditions:
(a) Tenant's right to exercise the Extension Option shall be subject
to the conditions that (i) at the time of exercise of the Extension Option
this Lease shall be in full force and effect, Tenant's right of possession
of the Premises shall not have been terminated and Tenant shall not be in
Default, and (ii) Tenant shall have either (A) exercised the Option to
Lease provided for in Section 32 of this Lease, or (B) shall have elected
to lease Offered Premises pursuant to Section 36 of this Lease, and, in
either event, the lease of such Option Premises or Offered Premises, as the
case may be, shall have commenced; provided, however, Landlord may at its
option waive any of the conditions set forth in this subsection (a).
(b) The Fourth (4th) Lease Year shall be upon the same terms,
covenants and conditions as are contained in this Lease, except that (i)
Base Rent shall be modified as set forth hereinafter and as described in
Section 1 of this Lease, and the Additional Rent provisions of Section 2 of
this Lease shall be applicable; (ii) Sections 32, 34 and the Workletter
shall not apply; and (iii) this Section 33 shall not apply to the extent
that the effect would be to grant any further Extension Option beyond this
option to extend the Term for the Fourth (4th) Lease Year.
(c) The Fourth (4th) Lease Year, if elected, shall be an extension of
the Lease Term for the Fourth (4th) Lease Year with respect to the entire
Premises as then constituted, and Tenant shall have no right to exercise
the Extension Option as to less than all of the then Premises.
(d) Tenant shall exercise the Extension Option by written notice of
such exercise given by Tenant to Landlord on or before the last day of the
Second (2nd) Lease Year, time being of the essence.
(e) The Base Rent for the Premises for the Fourth (4th) Lease Year
shall be an amount equal to the product of Twelve and No/100 Dollars
($12.00) per rentable square foot of the Premises as then constituted. In
addition, Tenant shall pay Additional Rent for and during the Fourth (4th)
Lease Year in accordance with the provisions of Section 2 of this Lease, it
being understood and agreed that the Rent for the Fourth (4th) Lease Year
is a so called net rent (that is, Tenant shall pay both Base Rent and its
Tenant's Proportion Share of Taxes and Expenses as Additional Rent).
(f) Following exercise by Tenant of the Extension Option, and within
thirty (30) days following written request by either Landlord or Tenant,
Landlord and Tenant shall enter into an amendment of or supplement to this
Lease confirming the terms, conditions and provisions applicable to the
Fourth (4th) Lease Year as determined in accordance herewith,
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- --------------------------------------------------------------------------------
* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
but the failure of either party to do so shall not affect the validity or
effectiveness of Tenant's exercise of the Extension Option.
(g) In the event Tenant fails to timely exercise the Extension
Option, the Term of this Lease shall terminate at the expiration of the
Third (3rd) Lease Year, unless earlier terminated as provided in this
Lease.
34. Cancellation Option. Tenant shall have the option (the "Cancellation
Option") to terminate this Lease for all of the Premises hereunder effective as
of the last day of the Second (2nd) Lease Year (the "Tenant Termination Date"),
subject to the provisions and conditions set forth hereinafter. Tenant may elect
the Cancellation Option by giving written notice to Landlord (the "Termination
Notice") given not later than the last day of that calendar month which is four
(4) full calendar months prior to the last day of the Second (2nd) Lease Year
(the "Cancellation Notice Date"), time being of the essence. In the event
Tenant does not give its notice exercising the Cancellation Option prior to the
Cancellation Notice Date, Tenant shall have no further right pursuant to the
Cancellation Option to terminate this Lease. Once elected as provided herein,
and subject to the other terms and conditions of this Section and otherwise in
this Lease, an election hereunder by Tenant shall be irrevocable. Additionally,
the Cancellation Option is subject to the following terms, conditions and
limitations:
(a) (i) At the time of the exercise of the Cancellation Option this
Lease shall be in full force and effect, Tenant's right to possession of
the Premises shall not have been terminated and Tenant shall not be in
Default, (ii) Tenant shall not have exercised the Option to Lease as set
forth in Section 32 of this Lease and (iii) at the time of the Tenant
Termination Date this Lease shall be in full force and effect, Tenant's
right to possession of the Premises shall not have been terminated and
Tenant shall not be in Default hereunder; provided, however, Landlord may
at its option waive any of the conditions set forth in this subsection (a).
Notwithstanding the foregoing, Tenant shall in any event have the right to
effect the completion of the termination of this Lease by paying to
Landlord all Rent and other sums (including, without limitation, the
Cancellation Fee (hereinafter defined)) due and to become due (through the
Tenant Termination Date) to Landlord and complying with all other
obligations of Tenant under this Lease through the later of the Tenant
Termination Date and Tenant's vacation of the Premises, and curing any
Default under this Lease.
(b) Together with its election to terminate, Tenant shall pay to
Landlord a fee (the "Cancellation Fee") in consideration of the early
cancellation of the Term of this Lease equal to the product of * * * * *
times the Rentable Area of the Premises as then constituted.
(c) If this Lease is terminated pursuant to this Section 34, the Term
shall expire on the Tenant Termination Date as if such date had been set
forth in this Lease as the expiration date of the Term, and Tenant shall
vacate the Premises on or before the Tenant Termination Date in the manner
and subject to all of the provisions and obligations required by this
Lease. All obligations of Tenant which accrue under this Lease on or before
the later of the Tenant Termination Date and the date upon which Tenant
shall surrender possession
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of the Premises shall survive such termination and neither the exercise of
such right to terminate nor such termination shall affect Landlord's
remedies on account of any default by Tenant which may exist as of the date
on which notice of exercise of such right is given or as of the Tenant
Termination Date and is not cured (including, without limitation, any
matter which, with the giving of notice or the passage of time, or both,
would constitute a Default by Tenant under this Lease pursuant to Section
16 of this Lease).
35. Roof Antennas.
(a) At any time during the Term, Tenant may, subject to the
provisions and conditions of this Section 35, install on the roof of the
Building one or more antennas, dishes, or other facilities (but such
facilities (a) shall not exceed a total of five (5) dishes or antennas or a
combination of dishes and antennas; (b) each shall not exceed a height of
four (4) feet and a width or diameter, as the case may be, of three (3)
feet; and (c) the Antenna Site (hereinafter defined) shall not exceed sixty
(60) square feet) for the transmission and reception of radio, microwave,
or other communication signals (the "Antenna"). Prior to such installation,
Tenant shall deliver to Landlord for its review and approval (which
approval shall not be unreasonably withheld or delayed [but may be
reasonably conditioned], provided that the contemplated installation will
not affect the structure of the Building or its mechanical, electrical or
plumbing systems, or adversely affect the integrity of the roof structure
or membrane or adversely interfere with the broadcast or reception of any
other similar installations of Landlord or others on or in the Building or
on or in other buildings or contemplated installations or any modifications
of the same) plans and specifications for the Antenna which shall include,
without limitation, the proposed location of the Antenna on the roof (the
"Antenna Site") (Provided, however, Landlord may determine the location and
configuration of the Antenna Site in its sole discretion, and may require
Tenant to move the location of or modify the configuration of the Antenna
Site at Tenant's sole cost and expense at any time upon not less than
thirty (30) days' notice to Tenant.), the floor and power load requirements
of the Antenna, the location and kind of electrical or other services to
and from the Antenna, and detailed specification of the means of attaching
the Antenna to the roof and of all penetrations of the roof in connection
with such attaching, such services, or otherwise. Landlord may also require
Tenant at Tenant's sole cost and expense to provide screening to shield the
Antenna and Antenna Site from view.
(b) The Antenna Site shall be treated for all purposes of this
Lease relating to Tenant's obligations and liabilities (but not
otherwise) as if the same were part of the Premises (except with
respect to the payment of Rent), and the Antenna shall be treated as
Tenant's personal property (which Tenant shall be required to remove
upon the expiration or earlier termination of the Term of this Lease
or of Tenant's right to possession of the Premises; and Tenant shall
repair any damage occasioned by such removal and return the Building
to its condition prior to such installation of the Antenna). Without
limitation, all provisions of this Lease with respect to Tenant's
obligations to comply with laws and insurance requirements, maintain
insurance, indemnify Landlord Indemnitees and others, and perform
repairs and maintenance shall apply to Tenant's installation, use and
maintenance of the Antenna.
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(c) Tenant shall pay to Landlord all costs of any services
required for use of the Antenna to the extent Tenant has not paid the
cost directly to an outside service provider. Tenant shall be
responsible for performing all maintenance and repair of any kind
respecting the Antenna and shall keep the same in a safe condition and
in good order and repair, subject to notice to Landlord regarding the
nature and details of all such matters and the right of Landlord to
supervise the same, without liability or responsibility therefor:
(d) Tenant, its employees, agents and contractors shall have
reasonable access to the roof of the Building and the Antenna Site for
purposes of installation, maintenance and repair of the Antenna at all
reasonable times upon reasonable advance notice to Landlord, and
subject to reasonable rules and procedures of Landlord respecting such
matters as, without limitation, insurance.
(e) If Tenant installs an Antenna in accordance with this
Section 35 and then removes the same, Tenant may again elect to
install an Antenna on the roof, and such election and installation
shall be carried out in accordance with this Section in all respects
as if Tenant had not previously installed an Antenna.
(f) The right granted hereby is appurtenant to this Lease and
does not grant any rights by lease, easement or otherwise in any
property, but only a limited right and license of use as provided
hereby; and Tenant shall have no right to sell or assign (other than
as appurtenant to the assignment of the Lease or sublease of the
entire Premises), whether or not for consideration, the right granted
hereby.
(g) The right granted hereby is subject to casualty, rights of
eminent domain, governmental rules, regulations and laws and other
matters which prohibit Landlord from being able to provide or to
continue to provide the rights granted hereby by Landlord. The right
granted hereby is further subject to all federal, state and local
laws, rules and regulations, and any regulations of any agency of any
federal, state or local governmental unit. In addition, in the event
that Tenant's use of the Antenna shall adversely interfere with the
broadcast or reception of other installations of Landlord or others on
or in the Building or other buildings located on property subject to
the Declaration, then upon notice from Landlord, Tenant shall, at its
sole cost and expense, either remove the Antenna or cause such
interference to cease.
(h) Tenant understands and agrees that such installation shall
be made and maintained at the sole risk of Tenant, and neither
Landlord nor any other parties named or referred to in Section 13 of
this Lease, or any other party acting for or on behalf of Landlord
shall be liable for any damage thereto or occasioned thereby, except
for any wilful negligence of Landlord or any other party acting for or
on behalf of Landlord. In addition, Tenant hereby indemnifies and
agrees to hold harmless Landlord and the other Landlord Indemnitees
provided in Section 13 hereof with respect to all loss, costs
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(including reasonable attorneys' fees) and damages, any of the
foregoing indemnitees may incur by reason of or respecting any such
installation and use thereof by Tenant.
36. Right of Opportunity to Lease Space. Landlord hereby grants to Tenant
the right of opportunity ("Right of Opportunity") during the first two hundred
seventy (270) days of the Term of this Lease to lease the portions of the third
(3rd) floor of the Building, which are available for lease (referred to
hereinafter as the "Opportunity Premises"), subject to the terms and conditions
hereinafter set forth.
Prior to entering into the negotiation of any lease with any Tenant
Prospect (hereinafter defined) for any part or all of the Opportunity
Premises (such portion which Landlord intends to lease to any such Tenant
Prospect at any time being the "Offered Premises") during the first two
hundred seventy (270) days of the Term of this Lease only, so long as
Tenant shall not be in Default under this Lease, Landlord shall notify
Tenant in writing of the business and economic terms (including, without
limitation, the proposed term of the tenancy) upon which Landlord would be
willing to lease the Offered Premises to such tenant prospect, and Tenant
shall have the right for a period of ten (10) calendar days from and after
the giving of such notice within which to notify Landlord that it will
lease the Offered Premises on the terms and conditions as contained in
Landlord's notice (including, without limitation, Rent and term, even
though the acceptance of the Offered Premises for such term may have the
effect of extending the Term of this Lease as to the Offered Premises only
beyond the stated expiration date of the Term of this Lease) and other
terms and conditions of this Lease not in conflict with the terms in the
notice. If Tenant shall timely elect to lease the Offered Premises, then
Landlord and Tenant shall proceed in good faith to finalize such lease of
the Offered Premises. If Tenant elects to lease the Offered Premises, the
Offered Premises shall be added to this Lease and become Premises hereunder
by an amendment hereto and shall be governed by the terms and conditions of
this Lease as modified or supplemented by the terms in the notice as
aforesaid. If Tenant fails to notify Landlord in writing that it will
accept the Offered Premises within the prescribed ten (10) calendar day
period, Tenant's right to lease such Offered Premises shall be terminated
and Landlord may thereafter lease such Offered Premises to such other
tenant prospect free of the rights of Tenant, except as provided in the
next sentence. If Landlord elects to offer the Offered Premises to such
Tenant Prospect on terms economically less favorable (from Landlord's
perspective) by ten percent (10%), then Landlord shall again offer the
Offered Premises to Tenant on such less favorable (from Landlord's
perspective) economic terms in accordance with the provisions in this
grammatical paragraph.
Tenant may not elect to lease less than all of the Offered Premises
described in any notice from Landlord to Tenant concerning the Right of
Opportunity. In addition, Tenant's right to exercise the Right of
Opportunity in any instance and the commencement of the term for any
Offered Premises shall be conditioned upon satisfaction of the following
terms and conditions: (a) at the time of the exercise of the Right of
Opportunity this Lease shall be in full force and effect, Tenant's right to
possession of the Premises shall not have been terminated and Tenant shall
not be in Default hereunder, and, at Landlord's option, at the time the
term of the lease for the related Offered Premises commences, this Lease
shall be
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in full force and effect, Tenant's right to possession of the Premises
shall not have been terminated and Tenant shall not be in Default
hereunder; (b) at the time of the exercise of the Right of Opportunity and,
at Landlord's option, at the time the term of the lease for the related
Offered Premises commences, the original Tenant named herein or a Tenant
Affiliate shall be occupying (unless the Premises shall not yet have been
tendered to Tenant for its initial occupancy) all of the Rentable Area of
the Premises, and such Tenant shall not have assigned this Lease or sublet
any portion of the Premises other than to a Tenant Affiliate, or other than
as provided in the seventh (7/th/) grammatical paragraph of Section 12
appearing on page 26 of this Lease, it being agreed that the Right of
Opportunity granted hereby is personal to the named Tenant or a Tenant
Affiliate; (c) the term of the lease for the Offered Premises shall
commence on and shall end, unless sooner terminated as provided in this
Lease, on the dates set forth in the opportunity notice given with respect
to such Offered Premises, notwithstanding that the effect of the foregoing
understanding might be to extend the Term of this Lease beyond the Fourth
(4/th/) Lease Year, but with the Premises after the Fourth (4/th/) Lease
Year only constituting the Offered Premises; (d) in the event Landlord
shall be unable to tender possession of any Offered Premises to Tenant upon
the commencement of the term thereof, Landlord shall not be subject to any
liability on account thereof and the failure to do so shall not affect the
validity of this Lease or the obligations of Tenant under this Lease or the
lease of the Offered Premises by Tenant, or be construed to extend the term
as to such Offered Premises, or the Term of the remainder of the Premises,
but Rent shall not commence with respect to such Offered Premises until
Landlord tenders possession thereof to Tenant; and (e) Tenant shall accept
possession from Landlord of all Offered Premises in their "as is" condition
as of the date upon which the term of the lease for such Offered Premises
commences unless specifically provided to the contrary in the pertinent
opportunity notice.
As used in this Section 36, "Tenant Prospect" shall mean any
prospective lessee of premises on the third (3rd) floor only of the
Building (that is, a lessee not intending as of the date of execution of
its lease with Landlord to lease to lease or acquire rights to lease, such
as, without limitation, options and rights of opportunity, any space in the
Building other than or in addition to the space on the third (3rd) floor of
the Building) which prospect lessee has given to Landlord (or to whom
Landlord has given) a written proposal to lease such third (3rd) floor
space in the Building.
If and to the extent that Tenant shall lease Offered Premises
pursuant to this Section 36, its rights to lease Option Premises pursuant
to Section 32 of this Lease shall be correspondingly reduced as more
particularly provided in Section 32 of this Lease. Nothing in this Section
36 shall be deemed to affect Tenant's rights under Section 32 of this
Lease, except if and to the extent that Tenant shall actually lease Offered
Premises pursuant to the foregoing provisions of this Section 36.
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IN WITNESS WHEREOF, the parties have caused this Lease to be executed on
the date first above written.
LANDLORD:
8550 BRYN MAWR, L.L.C., a Delaware limited
liability company
By: /s/ Lawrence A. Debb
---------------------------------------------
Its: Executive Managing Director
-------------------------------------------
TENANT:
UBID, INC.,
a Delaware corporation
By: /s/ Thomas E. Werner
--------------------------------------------
Its: Chief Financial Officer
-------------------------------------------
<PAGE>
EXHIBIT 23.2
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 January 22, 1999 in the
Registration Statement (Form S-1) and related Prospectus of uBid, Inc. for the
registration of 2,300,000 shares of its common stock.
We also consent to the incorporation by reference therein of our report dated
January 22, 1999 with respect to the financial statement schedule of uBid, Inc.
for the year ended December 31, 1998 and for the period April 1, 1997
(Inception) to December 31, 1997 included in the Annual Report (Form 10-K) for
1998 filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Chicago, Illinois
August 30, 1999
