<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
UBID, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
[LOGO]
April 26, 1999
Dear Stockholder:
You are cordially invited to attend the 1999 Annual Meeting of Stockholders
of uBid, Inc., to be held on Monday, May 24, 1999, at the Westin O'Hare Hotel,
6100 River Road, Rosemont, Illinois, beginning at 10:00 a.m. local time.
The business to be conducted at the meeting includes the election of
directors, approval of the uBid, Inc. 1998 Stock Incentive Plan, ratification
of the selection of independent auditors and consideration of any other
matters that may properly come before the meeting and any adjournment thereof.
The enclosed Notice of Annual Meeting and Proxy Statement provide further
details of the business to be conducted at the Annual Meeting.
Whether or not you plan to attend the Annual Meeting, we hope that you will
have your stock represented by completing, signing, dating and returning the
enclosed proxy card in the enclosed envelope as soon as possible. Your stock
will be voted in accordance with the instructions you have given in your
proxy. If you do attend the meeting and wish to vote in person, you may
withdraw your proxy at that time.
We look forward to welcoming you at the meeting.
Sincerely,
/s/ Gregory K. Jones
Gregory K. Jones
Chairman of the Board of Directors,
President and Chief Executive
Officer
<PAGE>
[LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held on May 24, 1999
The Annual Meeting of Stockholders of uBid, Inc. (the "Company"), will be
held at the Westin O'Hare Hotel, 6100 River Road, Rosemont, Illinois on
Monday, May 24, 1999 at 10:00 a.m., local time, for the following purposes:
1. To elect two Class I directors of the Company to serve for a term of
3 years or until their respective successors are duly elected and
qualified;
2. To approve the uBid, Inc. 1998 Stock Incentive Plan;
3. To ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for its 1999 fiscal year; and
4. To transact any such other business as may properly come before the
Annual Meeting or any adjournment or postponement thereof.
The foregoing items of business, including the nominees for directors, are
more fully described in the Proxy Statement which is attached and made a part
of this notice. A copy of the Company's Annual Report for the fiscal year
ended December 31, 1998, containing consolidated financial statements, is
included with this mailing.
The Board of Directors has fixed the close of business on April 9, 1999 as
the record date for determining stockholders entitled to receive notice of and
to vote at the Annual Meeting and at any adjournment or postponement thereof.
A list of such stockholders will be available for examination by any
stockholder at the Annual Meeting and, for any purpose germane to the Annual
Meeting, at the offices of the Company, 2525 Busse Road, Elk Grove Village,
Illinois for a period of ten days prior to the Annual Meeting. The officers
and directors of the Company cordially invite you to attend the Annual
Meeting.
By Order of the Board of Directors
/s/ Frank Khulushi
Frank F. Khulusi
Secretary
April 26, 1999
YOUR VOTE IS IMPORTANT
Please indicate your voting instructions on the enclosed proxy card and
date, sign and return it in the envelope provided, which is addressed for
your convenience and needs no postage if mailed in the United States. In
order to avoid the additional expense to the Company of further
solicitation, we ask your cooperation in promptly mailing in your proxy
card.
<PAGE>
uBID, INC.
2525 Busse Road
Elk Grove Village, Illinois 60007
----------------
PROXY STATEMENT
Annual Meeting of Stockholders
To be held on May 24, 1999
----------------
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of uBid, Inc. ("uBid" or the "Company") for
use at the Company's Annual Meeting of Stockholders to be held on Monday, May
24, 1999 (the "Annual Meeting"), at 10:00 a.m., local time, at the Westin
O'Hare Hotel, 6100 River Road, Rosemont, Illinois and at any adjournment or
postponement thereof. At the Annual Meeting, stockholders will be asked to
consider and vote upon the election of two Class I directors, to approve the
uBid, Inc. 1998 Stock Incentive Plan (the "Plan"), to ratify the appointment
of Ernst & Young LLP as the Company's independent auditors for 1999 and to
transact any other business that may properly come before the Annual Meeting.
This Proxy Statement and the accompanying proxy are first being sent to
stockholders on or about April 26, 1999.
Voting at the Annual Meeting
The only issued and outstanding voting securities of the Company are its
shares of Common Stock, $.001 par value (the "Common Stock"), of which
9,146,883 shares were outstanding at the close of business on April 9, 1999.
Only holders of record at the close of business on April 9, 1999 (the "Record
Date") are entitled to receive notice of and to vote at the Annual Meeting and
any adjournment or postponement thereof. Except as described below, the
holders of the Common Stock of the Company are entitled to one vote per share
on each matter submitted to a vote of stockholders. The Company's Amended and
Restated Bylaws do not provide for cumulative voting by stockholders.
The holders of a majority of the Company's outstanding Common Stock,
present in person or by proxy, will constitute a quorum for the transaction of
business at the Annual Meeting or any adjournment thereof. While there is no
definitive statutory or case law authority in Delaware as to the proper
treatment of abstentions (also referred to as withheld votes), the Company
believes that abstentions should be counted for purposes of determining if a
quorum is present at the Annual Meeting for the transaction of business. With
respect to broker nominee votes, the Delaware Supreme Court has held that
broker nominee votes may be counted as present or represented for purposes of
determining the presence of a quorum. Abstentions are included in determining
the number of shares voted on the proposals submitted to stockholders (other
than the election of directors) and will have the same effect as a "no" vote
on such proposals, whereas broker non-votes are not counted. Directors are
elected by a plurality of the votes of the shares of Common Stock represented
and voted at the meeting and, abstentions and broker non-votes will have no
effect on the outcome of the election of directors. The affirmative vote of a
majority of the shares of Common Stock represented at the meeting in person or
by proxy is required for approval of the Plan and the ratifcation of the
appointment of auditors.
The Proxy
The persons named as proxyholders, Gregory K. Jones and Thomas E. Werner,
were selected by the Board of Directors of the Company and currently serve as
executive officers of the Company.
All shares represented by each properly executed, unrevoked proxy received
in time for the Annual Meeting will be voted in the manner specified therein.
If no specification is made on the proxy as to any one or
<PAGE>
more of the proposals, the Common Stock of the Company represented by the
proxy will be voted as to the proposal for which no specification is given as
follows: FOR the election of the director nominees named in this Proxy
Statement, FOR the approval of the uBid, Inc. 1998 Stock Incentive Plan, FOR
the ratification of the selection of Ernst & Young LLP as the Company's
independent auditors for the 1999 fiscal year and, with respect to any other
matters that may come before the Annual Meeting, at the discretion of the
proxyholders. The Company does not presently know of any other such business
to be conducted at the Annual Meeting. An executed proxy may be revoked at any
time before its exercise by filing with the Company's Chief Financial Officer
a written notice of revocation or a duly executed proxy bearing a later date.
The execution of the enclosed proxy will not affect a stockholder's right to
vote in person should such stockholder find it convenient to attend the Annual
Meeting and desire to vote in person. Attendance at the Annual Meeting will
not in itself constitute the revocation of a proxy.
As of the Record Date, Creative Computers, Inc. (the "Parent") was the
beneficial owner of 7,329,883 shares of the Common Stock of the Company,
constituting approximately 80.1% of the total voting power of all of the
outstanding shares of Company Common Stock which are entitled to vote at the
Annual Meeting. Management of the Parent has indicated to the Company that the
Parent intends to vote or direct the vote of all shares of Company Common
Stock beneficially owned by the Parent in favor of all three proposals. See
"Voting Securities and Principal Holders Thereof."
Solicitation
The expense of soliciting proxies will be borne by the Company. Proxies
will be solicited principally through the use of the mail, but directors,
officers and regular employees of the Company may solicit proxies personally
or by telephone or special letter without any additional compensation. The
Company also will reimburse banks, brokerage houses and other custodians,
nominees and fiduciaries for any reasonable expenses in forwarding proxy
materials to beneficial owners. In the discretion of management, the Company
reserves the right to retain a professional firm of proxy solicitors to assist
in solicitation of proxies. Although management does not currently expect to
retain such a firm, it estimates that the fees of such firm would range from
$5,000 to $10,000 plus out-of-pocket expenses, all of which would be paid by
the Company.
PROPOSAL ONE
ELECTION OF DIRECTORS
The Company's Board of Directors is divided into three classes, as nearly
equal in number as the then-total number of directors at the time of initial
election, with the term of office of one class expiring each year. Vacancies
on the Board and newly created directorships are filled by vote of a majority
of directors then in office, and any directors so chosen will hold office
until the next election of the class for which such directors were chosen. On
February 12, 1999, the Board of Directors increased the number of directors to
five in accordance with Section 3.1 of the Company's Amended and Restated
Bylaws and unanimously appointed Mark C. Layton to serve as a director until
the 1999 Annual Meeting.
At the Annual Meeting, two individuals will be elected as Class I directors
of the Company to serve for a three year term and until their respective
successors are duly elected and qualified. The Board of Directors has
nominated Frank F. Khulusi and Mark C. Layton for election as Class I
directors at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE TO APPROVE THE NOMINEES FOR
ELECTION AS MEMBERS OF THE BOARD OF DIRECTORS.
The proxies given to the proxyholders will be voted or not voted as
directed therein and, if no direction is given, will be voted FOR approval of
the director nominees named herein. The Board of Directors knows of no reason
why the nominees should be unable or unwilling to serve, but if any of the
nominees should, for any reason, be unable or unwilling to serve, the proxies
will be voted for the election of such other person to the office of director
as the Board of Directors may recommend in the place of such nominee.
2
<PAGE>
Nominees and Directors
The table below sets forth the names, ages and positions of all nominees
and continuing directors as of April 14, 1999. A summary of the background and
experience of each of these individuals is set forth after the table.
Information regarding uBid's executive officers is set forth in Part I of its
Annual Report on Form 10-K under the heading "Executive Officers of the
Registrant."
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- ----------
<S> <C> <C>
Class I Directors (term
expires in 2002)
Frank F. Khulusi(1)... 32 Secretary and Director
Mark C. Layton........ 38 Director
Class II Directors (term
expires in 2000)
Howard A. Tullman(2).. 53 Director
Norman H. Wesley(2)... 49 Director
Class III Directors
(term expires in 2001)
Gregory K. Jones(1)... 38 Chairman, President and Chief Executive Officer
</TABLE>
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(1) Member of the Executive Committee.
(2) Member of Audit Committee and Compensation Committee.
Nominees
Frank F. Khulusi. Mr. Khulusi has been a director of the Company since its
incorporation in 1997, acted as its President until November 1997, and acted
as Chairman of the Board from the Company's incorporation to July 1998. Mr
Khulusi is a co-founder of 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. Mr. Layton became a member of the Board of Directors of the
Company 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.
Continuing Directors
Gregory K. Jones. Mr. Jones has been President and Chief Executive Officer
of the Company since November 1997 and Chairman of the Board since July 1998.
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.
Howard A. Tullman. Mr. Tullman joined the Board of Directors in June 1998.
Since June 1997, Mr. Tullman has served as the Chief Executive Officer of
Tunes.com (formerly JAMtv Corporation), which operates an Internet music site
specializing in the webcasting of live music events. From October 1996 to May
3
<PAGE>
1997, Mr. Tullman was one of the co-managers of Digital Entertainment Networks
LLC, the predecessor to JAMtv Corporation. From October 1993 to September
1996, Mr. Tullman served as the President and Chief Executive Officer of
Imagination Pilots, Inc., a multimedia software developer which he also
founded. Immediately prior to founding Imagination Pilots, Inc., Mr. Tullman
served as the Chief Executive Officer of Eager Enterprises, Inc., an
information industry venture capital firm which he founded in 1990. Mr.
Tullman received his B.A. degree from Northwestern University and a J.D. from
the Northwestern University School of Law.
Norman H. Wesley. Mr. Wesley became a member of the Board of Directors of
the Company in November 1998. Beginning 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 currently serves as Chairman and Chief Executive Officer
of Fortune Brands Home & Office, the consolidated operation of ACCO World
Corporation and MasterBrands Industries, Inc. Mr. Wesley joined ACCO in 1984
as Vice 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
The Company's 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 Common Stock, at an exercise price of $6.82 and $11.79,
respectively, per share, in connection with their becoming directors of the
Company. In connection with his appointment as a director in February 1999,
Mr. Layton was granted an option to purchase 18,325 shares of Common Stock at
an exercise price of $62.50 per share. Stock option grants made to the
Company's directors in 1998 were made under its informal stock option plan.
The Company intends to make future option grants to its non-employee directors
under the Company's 1998 Stock Incentive Plan. Other than as will be provided
in such Plan and the reimbursement of reasonable expenses incurred with
attending Board and Committee meetings, the Company has not yet adopted
specific policies on directors' compensation and benefits.
Committees of the Board
The Company has established three standing committees of its Board of
Directors, including an Executive Committee, an Audit Committee and a
Compensation Committee, effective as of the closing of the Company's initial
public offering in December 1998. The Company does 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 the Company, reviews and approves the scope of the annual audit
and reviews the results thereof with the Company's 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 the Company's 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 the executive officers of the Company.
The Compensation Committee is also responsible for administering the Company's
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.
4
<PAGE>
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 the Company except for the amendment of the Company's Bylaws or the
approval or recommendation of matters to the Company's stockholders.
Attendance at Board and Committee Meetings
During the fiscal year ended December 31, 1998, the Board of Directors met
three times and the Compensation Committee met once. The Audit Committee did
not hold any formal meetings during 1998. No director attended fewer than 75%
of the aggregate number of meetings held by the Board of Directors and all
committees of the Board on which such director served.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities and Exchange Act of 1934, as amended,
requires that the Company's executive officers and directors file reports of
beneficial ownership on Form 3 and changes in beneficial ownership on Forms 4
and 5 with the Securities and Exchange Commission (the "Commission").
Executive officers and directors are also required by the SEC rules to furnish
the Company with copies of all Section 16(a) reports they file. As part of a
Section 16 compliance program established by the Company for its executive
officers and directors, the Company undertakes to file these reports on behalf
of such individuals. Based solely on its review of the Forms 3, 4 and 5 filed
on behalf of its executive officers and directors, as well as written
representations from certain individuals that no Forms 5 are required by such
individuals, the Company believes that, during the fiscal year ended December
31, 1998, all Section 16(a) filing requirements applicable to its executive
officers and directors were complied with pursuant to the rules of the
Commission.
5
<PAGE>
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of April 14, 1999 (the "Ownership Date") by (i)
each person known by the Company to own more than 5% of such shares, (ii) each
of the Company's directors, (iii) the Company's Chief Executive Officer and
each of its four most highly compensated executive officers who served as
executive officers as of the Ownership Date, and (iv) all directors and
executive officers as a group. As of April 14, 1999, there were 9,146,883
issued and outstanding shares of Common Stock of the Company, not including
treasury shares or shares issuable upon exercise of options. Ownership
information has been supplied by each of the persons concerned. Unless
otherwise indicated by footnote, the named persons have sole voting and
investment power with respect to the shares of the Company's Common Stock
beneficially owned, subject to community property and similar laws, where
applicable.
<TABLE>
<CAPTION>
Shares Beneficially
Owned
----------------------
Beneficial Owner(1) Number (2) Percent
------------------- ------------ --------
<S> <C> <C>
Creative Computers, Inc.(3)........................ 7,329,883 80.1%
Gregory K. Jones(4)................................ 73,299 *
Thomas E. Werner................................... -- *
George Lu(5)....................................... 14,660 *
Timothy E. Takesue(6).............................. 14,660 *
David L. Hirschman(7).............................. 21,990 *
Frank F. Khulusi................................... -- *
Howard A. Tullman(8)............................... 6,665 *
Norman H. Wesley................................... 4,000 *
Mark C. Layton..................................... -- *
All directors and executive officers as a group (9
persons) (9)...................................... 135,274 1.5%
</TABLE>
- --------
* Represents holdings of less than 1%
(1) Except as otherwise specified, the address of each of the persons set
forth in the list above is: 2525 Busse Road, Elk Grove Village, Illinois
60007.
(2) The address of Creative Computers, Inc. is 2555 West 190th Street,
Torrance, California 90504.
(3) With respect to options included in the table that are presently vested or
will vest within 60 days of the Ownership Date, no such options are
exercisable until the earlier of (i) the day following the distribution of
all Company stock held by the Parent to its shareholders or (ii) 18 months
from the closing date of the Company's initial public offering. See
"Executive Compensation--Summary of Option Grants."
(4) Includes options to purchase approximately 73,299 shares of Common Stock
which are presently vested or will vest within 60 days of the Ownership
Date.
(5) Includes options to purchase approximately 14,660 shares of Common Stock
which are presently vested or will vest within 60 days of the Ownership
Date.
(6) Includes options to purchase approximately 14,660 shares of Common Stock
which are presently vested or will vest within 60 days of the Ownership
Date.
(7) Includes options to purchase approximately 21,990 shares of Common Stock
which are presently vested or will vest within 60 days of the Ownership
Date.
(8) Includes options to purchase approximately 3,665 shares of Common Stock
which are presently vested or will vest within 60 days of the Ownership
Date.
(9) Includes an aggregate of 128,274 shares of Common Stock issuable upon
exercise of stock options which are presently vested or will vest within
60 days of the Ownership Date.
6
<PAGE>
EXECUTIVE COMPENSATION
Summary of Executive Compensation
The following table sets forth for period from the Company's inception in
1997 to December 31, 1998 the compensation of Gregory K. Jones, the Company's
President and Chief Executive Officer, and the Company's other executive
officers (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation(2) Awards
----------------------------------- ------------
Securities All Other
Name and Principal Salary Other Annual Underlying Compensation
Position(1) Year ($) Bonus ($) Compensation ($) Options (#) ($)(3)
------------------ ---- -------- --------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Jones........ 1998 $175,000 $50,000 -- -- $1,630
Chairman, President and
Chief 1997 19,519 -- -- 366,494 --
Executive Officer
Thomas E. Werner(4)..... 1998 6,153 -- -- 109,948 --
Vice President, Chief
Financial
Officer and Assistant
Secretary
George Lu(4)............ 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(5)... 1998 134,461 -- -- 109,948 858
Sr. Vice President--
Operations 1997 69,560 -- -- -- --
</TABLE>
- --------
(1) Richard M. Finkbeiner, the former Chief Financial Officer of the Parent,
served as the Chief Financial Officer of the Company from Inception
through September 21, 1998. Mr. Finkbeiner did not receive any
compensation from the Company in 1997. Mr. Finkbeiner's compensation from
the Parent in 1997 consisted of salary of $233,063, a cash bonus of
$94,653, relocation expenses and allowances paid by the Parent in an
aggregate amount of $15,246 and an option to purchase 20,000 shares of
Parent Common Stock with an exercise price of $7.125 per share. His
compensation from the Parent in 1998 consisted of a base salary of
$239,668. All compensation paid to Mr. Finkbeiner was for services
provided to the Parent, and no allocation was made for services provided
to the Company.
(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.
(3) Consists of Company 401(k) Plan matching contributions on behalf of the
Named Executive Officer.
(4) Mr. Werner and Mr. Lu joined the Company in 1998.
(5) Prior to joining the Company, Mr. Hirschman was employed by the Parent and
received for his services to the Parent in 1997 a salary of $70,369, a
cash bonus of $18,336 and options to purchase 24,600 shares of Parent
Common Stock with exercise prices ranging from $5.50 to $6.00 per share.
7
<PAGE>
Summary of Option Grants
The following table sets forth the individual grants of stock options made
by the Company during the fiscal year ended December 31, 1998 to each of the
Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------
Potential Realizable
Value at
Assumed
Annual Rates
of Stock
Number of % of Total Price
Securities Options Appreciation
Underlying Granted to for
Options Employees Exercise Option Term(3)
Granted in Last Price Expiration ---------------------
Name (#)(1) Fiscal Year(2) ($/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 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
the Company's initial public offering. Upon a merger, sale of
substantially all of the assets or similar transaction involving the
Company that results in a change of control ("Change of Control"), the
next 20% installment of the option will vest (the "Accelerated
Installment") along with a prorated amount of any additional number of
unvested shares covered by the option calculated by (x) subtracting the
number of full months remaining until the normal annual vesting date of
the Accelerated Installment from 12, (y) dividing the difference by 12 and
(z) multiplying the resulting fraction times the number of shares covered
by the next 20% installment. Notwithstanding the vesting described above,
no option will be exercisable until the earlier of (i) the day following
the distribution of all Company stock held by the Parent to its
shareholders or (ii) 18 months from the closing date of the Company's
initial public offering. See "Employment Agreements and Change-in-Control
Arrangements."
(2) Based on an aggregate of 649,160 options granted to directors and
employees of the Company 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.
8
<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 the
Company's 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 the Company's Common Stock as reported
on the Nasdaq National Market on April 14, 1999 was $58.50
401(k) Plan
Currently, the Company's employees participate in the Parent's 401(k)
Savings and Retirement Plan. The Services Agreement entered into by the
Company and the Parent provides that, for the lesser of (i) one year after the
distribution of all Company stock held by the Parent to its shareholders or
(ii) until such time as the Company establishes its own 401(k) plan, the
Company's employees will continue to participate in the Parent's 401(k) plan.
See "Certain Relationships and Related Transactions--Services Agreement." The
Company intends to adopt its own 401(k) Savings and Retirement Plan in the
future that is intended to qualify for preferential tax treatment under
section 401(k) of the Code ("401(k) Plan"). Although the Company has not yet
adopted the specific terms of the 401(k) Plan, the Company intends that most
of the employees of the Company will be eligible to participate in the 401(k)
Plan upon adoption.
Employment Agreements and Change-in-Control Arrangements
The Company has entered into an employment agreement with Gregory K. Jones,
President and Chief Executive Officer of the Company. The agreement with Mr.
Jones is terminable by Mr. Jones upon 30 days prior written notice or by the
Company at any time. Pursuant to this agreement, Mr. Jones receives base
salary in the amount of $175,000, subject to increase or decrease by mutual
agreement or pursuant to the Board of Directors' annual review policy and
budgeting procedures. Mr. Jones is also eligible to receive annual bonuses, at
the sole discretion of the Board, up to a current maximum annual amount of
$50,000. 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 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 the Company that results in a Change of Control,
Mr. Jones' option will become fully vested.
In addition to Mr. Jones' employment agreement as described above, Thomas
Werner, Vice President and Chief Financial Officer of the Company, Timothy E.
Takesue, Vice President--Merchandising, and David
9
<PAGE>
Hirschman, Senior Vice President--Operations of the Company, have the right to
receive three months' salary if their employment is terminated by the Company.
Pursuant to stock option agreements covering options granted by the Company
under its informal stock option plan to persons other than Mr. Jones, upon a
merger, sale of substantially all of the assets or similar transaction
involving the Company that results in a change of control of the Company, 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
(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. In addition, the Administrator
of the Company's 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 such Plan, upon the occurrence of certain
events resulting in a change of control of the Company 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 the Company's informal option
plan. See "Proposal Two: Approval of the 1998 Stock Incentive Plan--Corporate
Transactions, Changes in Control and Related Entity Dispositions."
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's executive compensation program has been administered by the
Compensation Committee of the Board of Directors since December 1998. Prior to
December 1998, compensation decisions and grants of stock options were made by
the Board of Directors of the Company. The current members of the Compensation
Committee are Mr. Tullman and Mr. Wesley, each of whom is a non-employee
director within the meaning of Section 16 of the Exchange Act, and an "outside
director" within the meaning of Section 162(m) of the Code.
General Compensation Philosophy
The role of the Compensation Committee is to review and administer all
compensation arrangements for executive officers of uBid, and to be
responsible for administering uBid's stock plans. uBid's compensation
philosophy for officers is to relate compensation to corporate performance and
increases in stockholder value, while providing a total compensation package
that is competitive and enables uBid to attract, motivate, reward and retain
key executives and employees. The Compensation Committee currently uses
salaries, bonuses and stock options to meet these goals.
Executive Compensation
Base Salary. Salaries for executive officers for 1998 were generally
determined by the Board of Directors on an individual basis at the time of
hiring. The majority of uBid's executives were hired prior to the formation of
the Compensation Committee. For 1999, the Compensation Committee will review
the base salaries of the executive officers by evaluating each executive's
scope of responsibility, performance, prior experience and salary history, as
well as the salaries for similar positions at comparable companies.
Annual Incentive Awards. During 1998, uBid had no formal bonus plan.
Bonuses payable to executives were determined by negotiations between the
particular executive and uBid during the hiring process. In December 1998, the
Compensation Committee approved a bonus for Mr. Jones of $50,000 pursuant to
the employment agreement between the Company and Mr. Jones.
Long-Term Incentive Awards. The Compensation Committee believes that
equity-based compensation in the form of stock options links the interests of
executives with the long-term interests of uBid's stockholders and encourages
executives to remain in uBid's employ. Since its inception in 1997, the
Company has issued stock options to executives pursuant to its informal stock
option plan. Beginning in 1999, the Compensation Committee plans to grant
options in accordance with its 1998 Stock Incentive Plan. Grants are awarded
based on a number of factors, including the individual's level of
responsibility, the amount and term of options already held by the individual,
the individual's contributions to the achievement of uBid's financial and
strategic objectives, and industry practices and norms.
10
<PAGE>
Chief Executive Officer Compensation
Mr. Jones' base salary for 1998 was paid pursuant to the terms of his 1997
employment agreement with the Company. In December 1998, the Compensation
Committee approved a bonus for Mr. Jones of $50,000 pursuant to his employment
agreement. Mr. Jones did not receive any stock options during fiscal 1998. For
1999, the Compensation Committee will evaluate his compensation consistent
with the factors described above for all executive officers.
Internal Revenue Code Section 162(m) Limitation
Section 162(m) of the Code limits the tax deduction to $1 million for
compensation paid to certain executives of public companies. However,
performance-based compensation that has been approved by stockholders is
excluded from the $1 million limit if, among other requirements, the
compensation is payable only upon attainment of pre-established, objective
performance goals and the Board committee that establishes such goals consists
only of "outside directors." Additionally, stock options will qualify for the
performance-based exception where, among other requirements, the exercise
price of the option is not less than the fair market value of the stock on the
date of grant, and the plan includes a per-executive limitation on the number
of shares for which options may be granted during a specified period. All
members of the Compensation Committee qualify as outside directors. The 1998
Stock Incentive Plan is being submitted to the Company's stockholders for
approval in order that grants made thereunder will meet the Section 162(m)
requirements for "performance based" compensation and be exempt from the
limitations on deductibility. Historically, the combined salary and bonus of
each executive officer has been below the $1 million limit. The Compensation
Committee's present intention is to grant future compensation that does not
exceed the limitations of Section 162(m), although the Compensation Committee
reserves the right to award compensation that does not comply with these
limits on a case-by-case basis.
COMPENSATION COMMITTEE
Howard A. Tullman
Norman K. Wesley
11
<PAGE>
COMPANY STOCK PRICE PERFORMANCE
The following performance graph compares the cumulative stockholder return
on the Company's Common Stock, assuming an initial investment of $100, for the
period beginning on December 4, 1998 and ending on December 31, 1998, with the
cumulative total return of a broad market index (Nasdaq Stock Market--U.S.
Composite Index) and an industry index (Hambrecht & Quist Internet Index--
Commerce Technologies & Services Sector) for the same period. The Company paid
no dividends during the periods shown; the performance of the indexes is shown
on a total return (dividend reinvestment) basis. The graph was prepared by the
Company with data provided by Research Data Group. The graph lines merely
connect the prices on the dates indicated and do not reflect fluctuations
between those dates.
Pursuant to the rules and interpretations of the Commission, the chart
below is calculated using as the beginning measurement period the closing
price of the Company's Common Stock on December 4, 1998 (the first day of
trading in the Company's Common Stock in its initial public offering), which
was $48. The initial public offering price of the Company's Common Stock was
$15.00 per share. The comparisons in the graph below are based on historical
data and are not intended to forecast the possible future performance of the
Company's Common Stock.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG uBID, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE HAMBRECHT & QUIST INTERNET INDEX--
COMMERCE TECHNOLOGIES & SERVICES SECTOR
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Measurement Nasdaq Stock Market Hambrecht & Quist Internet Index--
Date uBid Common Stock (U.S.) Index Commerce Technologies & Services Sector
----------- ----------------- ------------------- ---------------------------------------
<S> <C> <C> <C>
12/04/98 $100 $100 $100
12/31/98 $222 $110 $127
</TABLE>
The foregoing report of the Compensation Committee of the Board of
Directors on executive compensation and the performance graph that appears
immediately above shall not be deemed to be soliciting material or to be filed
under the Securities Act of 1933 or the Securities Exchange Act of 1934, or
incorporated by reference in any document so filed.
12
<PAGE>
Compensation Committee Interlocks and Insider Participation
Since its establishment in December 1998, the Compensation Committee
consisted of Messrs. Tullman and Wesley, neither of whom is or has been an
officer or employee of the Company. Prior to the establishment of the
Compensation Committee, the Board of Directors set the compensation of the
Company's officers. Mr. Jones, who has served as the Company'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 the Parent, with which the Company has engaged in several
transactions which are described under the caption "Certain Relationships and
Related Transactions" below.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1999, the Company entered into indemnification agreements with
each of its 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 the Company's Amended and Restated
Bylaws, as well as certain additional procedural protections. Such indemnity
agreements provide generally that the Company will advance expenses incurred
by directors and executive officers in any action or proceeding as to which
they may be indemnified, and require the Company to indemnify such individuals
to the fullest extent permitted by law.
Historical Intercompany Relationships
Prior to the Company's initial public offering (the "Offering"), the
Company was a wholly-owned, indirect subsidiary of the Parent. As a wholly-
owned subsidiary, the Company received various services provided by the
Parent, including administration (accounting, human resources, legal),
warehousing and distribution (through June 1998), Internet/telecom and joint
marketing. The Parent has also provided the Company with the services of a
number of its executives and employees. In consideration for these services,
the Parent historically allocated a portion of its overhead costs related to
such services to the Company. Management of the Company believes that the
amounts allocated to the Company have been no less favorable to the Company
than the expenses the Company would have incurred to obtain such services on
its own or from unaffiliated third parties. None of these services were
provided to the Company pursuant to any written agreement between the Company
and the Parent.
Separation from the Parent
The Parent has announced that, subject to certain conditions, the Parent
intends to separate the Company from the Parent's other operations and
businesses (the "Separation") and to distribute to its stockholders all of the
uBid Common Stock owned by the Parent (the "Distribution") in no event prior
to 180 days after the December 9, 1998 closing date of the Company's initial
public offering, (the "Offering Closing Date"). The Separation will establish
the Company as a stand-alone entity with objectives separate from those of the
Parent. The Company intends to focus its resources and management emphasis on
the operations and markets it views as critical to its long-term success as a
stand-alone entity. In December 1998, the Company and the Parent entered into
a Separation and Distribution Agreement (the "Separation and Distribution
Agreement") and certain other agreements providing for the Separation and the
Distribution, the provision by the Parent of certain interim services to the
Company, and addressing employee benefit arrangements, and tax and other
matters. These agreements (the "Ancillary Agreements") are discussed below.
Separation and Distribution Agreement
The Separation and Distribution Agreement entered into between the Company
and the Parent sets forth certain agreements among the Company and the Parent,
with respect to the principal corporate transactions required to effect the
Separation, the Offering and the Distribution, and certain other agreements
governing the relationship among the parties thereafter.
13
<PAGE>
The Distribution. The Separation and Distribution Agreement provides that,
subject to the terms and conditions thereof, the Parent and the Company will
take all reasonable steps necessary and appropriate to cause all conditions to
the Distribution to be satisfied and to effect the Distribution. The Board of
Directors of the Parent (the "Parent Board") will have the sole discretion to
set the date of the distribution (the "Distribution Date") for any date after
June 7, 1999 and ending on or prior to December 31, 1999. In accordance with
the Separation and Distribution Agreement, completion of the Distribution will
be subject to the satisfaction, or waiver by the Parent Board, of the
following conditions: (i) the opinion of PricewaterhouseCoopers LLP as to the
tax-free nature of the Distribution (the "PwC Opinion") shall have been
obtained, in form and substance satisfactory to the Parent, and be confirmed
at the time of Distribution; (ii) if the Parent decides to seek a private
letter ruling from the Internal Revenue Service (a "Letter Ruling"), the
Letter Ruling shall have been obtained and remain effective consistent with
the conclusions reached in the PwC Opinion, and such ruling shall be in form
and substance satisfactory to the Parent, in its sole discretion; (iii) any
material Governmental Approvals and Consents (as such terms are defined in the
Separation and Distribution Agreement) necessary to consummate the
Distribution shall have been obtained and shall be in full force and effect;
(iv) no order, injunction or decree issued by any court or agency of competent
jurisdiction or other legal restraint or prohibition preventing the
consummation of the Distribution shall be in effect, and no other event
outside the control of the Parent shall have occurred or failed to occur that
prevents the consummation of the Distribution; and (v) no other events or
developments shall have occurred subsequent to the closing of the Offering
that, in the judgment of the Parent Board, would result in the Distribution
having a material adverse effect on the Parent or on the stockholders of the
Parent. The Parent has agreed to consummate the Distribution, subject to the
satisfaction of the conditions set forth above. The Parent may terminate the
obligation to consummate the Distribution if the Distribution has not occurred
by December 31, 1999, unless extended by the Parent and the Company. In
addition, the Separation and Distribution Agreement may be amended or
terminated at any time prior to the Distribution Date by the mutual consent of
the Company and the Parent.
The Company and the Parent have agreed that none of the parties will take,
or permit any of its affiliates to take, any action which reasonably could be
expected to prevent the Distribution from qualifying as a tax-free
distribution to the Parent and the Parent's stockholders pursuant to Section
355 of the Internal Revenue Code of 1986, as amended (the "Code"). The parties
have also agreed to take any reasonable actions necessary in order for the
Distribution to qualify as a tax-free distribution to the Parent and the
Parent's stockholders pursuant to Section 355 of the Code. Without limiting
the foregoing, prior to the Distribution Date, the Company will not issue or
grant, directly or indirectly, any shares of its capital stock or any rights,
warrants, options or other securities to purchase or acquire (whether upon
conversion, exchange or otherwise) any shares of its capital stock (whether or
not then exercisable, convertible or exchangeable) that would affect the tax-
free nature of the Distribution.
Registration Rights. The Separation and Distribution Agreement provides
that the Parent, and Messrs. Frank and Sam Khulusi, holders of approximately
18% and 19%, respectively of Parent Common Stock, will have the right in
certain circumstances, but in no event prior to June 7, 1999 (in the case of
the Parent) and 180 days after the Distribution (in the case of Messrs. Frank
and Sam Khulusi), to require the Company to use its best efforts to register
for resale shares of Common Stock held by them under the Securities Act of
1933, as amended ("1933 Act"), subject to certain conditions, limitations and
exceptions ("Demand Registration"). The Company also has agreed with the
Parent and Messrs. Frank and Sam Khulusi that if the Company files a
registration statement for the sale of securities under the 1933 Act, then
such persons may, subject to certain conditions, limitations and exceptions,
include in such registration statement shares of Common Stock held by them
("Piggyback Registration"). In addition, for an additional 90 days after the
applicable 180-day period, the Company will be entitled to include its shares
in any requested Demand Registration and to reduce the number of shares to be
sold by the Parent or Messrs. Frank and Sam Khulusi thereunder to a minimum of
20%, collectively, of the total offering plus the amount of any underwriters'
over-allotment option. In the case of Messrs. Frank and Sam Khulusi, the
Company will bear up to $100,000 of the cost of the first, and up to $50,000
of the second, requested registrations and will bear the cost of all piggyback
registrations. In addition, the Parent's registration rights will terminate
upon consummation of the Distribution.
14
<PAGE>
Releases and Indemnification. The Separation and Distribution Agreement
provides for a full and complete release and discharge as of the Offering
Closing Date of all liabilities, known or unknown, existing or arising from
all acts and events occurring or failing to occur or alleged to have occurred
or to have failed to occur and all conditions existing or alleged to have
existed on or before the Offering Closing Date, between the Company and the
Parent (including any contractual agreements or arrangements existing or
alleged to exist between them on or before the Offering Closing Date), except
as expressly set forth in the Separation and Distribution Agreement.
Except as provided in the Separation and Distribution Agreement, the
Company has agreed to indemnify, defend and hold harmless the Parent and each
of the Parent's directors, officers and employees from and against all
liabilities relating to, arising out of or resulting from: (i) the failure of
the Company or any other person to pay, perform or otherwise promptly
discharge any liabilities of the Company in accordance with their respective
terms; (ii) any breach by the Company of the Separation and Distribution
Agreement or any of the Ancillary Agreements; and (iii) any untrue statement
or alleged untrue statement of a material fact or omission or alleged omission
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, with respect to all information
contained in the Prospectus or the Registration Statement used in connection
with the Offering.
Except as provided in the Separation and Distribution Agreement, the Parent
has agreed to indemnify, defend and hold harmless the Company and each of the
Company's directors, officers and employees from and against all liabilities
relating to, arising out of or resulting from: (i) the failure of the Parent
or any other person to pay, perform or otherwise promptly discharge any
liabilities of the Parent other than the liabilities of the Company; and (ii)
any breach by the Parent of the Separation and Distribution Agreement or any
of the Ancillary Agreements. Neither the Company nor the Parent is obligated
under the Separation and Distribution Agreement to indemnify the other for:
(i) any liability, contingent or otherwise, assumed, transferred, assigned or
allocated to the other under the Separation and Distribution Agreement or any
Ancillary Agreement; (ii) any liability for the sale, lease, construction or
receipt of goods, property or services purchased, obtained or used in the
ordinary course of business between the parties prior to December 9, 1998;
(iii) any liability for unpaid amounts for products or services or refunds
owing on products or services due on a value-received basis for work done by
one party at the request or on behalf of the other; (iv) any liability that
the Company or the Parent may have with respect to indemnification or
contribution pursuant to the Separation and Distribution Agreement for claims
brought against other party by third persons; or (v) generally, any liability
the release of which would result in the release of any person other than a
person released pursuant to the Separation and Distribution Agreement.
The Separation and Distribution Agreement contains provisions that govern,
except as otherwise provided in any Ancillary Agreement, the resolution of
disputes, controversies or claims that may arise between or among the parties.
These provisions contemplate that efforts will be made to resolve disputes,
controversies and claims by escalation of the matter to senior management (or
other mutually agreed) representatives of the parties. If such efforts are not
successful, any party may submit the dispute, controversy or claim to
mandatory, binding arbitration, subject to the provisions of the Separation
and Distribution Agreement. The Separation and Distribution Agreement contains
procedures for the selection of a sole arbitrator of the dispute, controversy
or claim and for the conduct of the arbitration hearing, including certain
limitations on discovery rights of the parties. These procedures are intended
to produce an expeditious resolution of any such dispute, controversy or
claim.
In the event that any dispute, controversy or claim is, or is reasonably
likely to be, in excess of $5 million, or in the event that an arbitration
award in excess of $5 million is issued in any arbitration proceeding
commenced under the Separation and Distribution Agreement, subject to certain
conditions, any party may submit such dispute, controversy or claim to a court
of competent jurisdiction and the arbitration provisions contained in the
Separation and Distribution Agreement will not apply. In the event that the
parties do not agree that the amount in controversy is in excess of $5
million, the Separation and Distribution Agreement provides for arbitration of
such disagreement.
15
<PAGE>
Noncompetition; Certain Business Transactions. The Separation and
Distribution Agreement provides that, for a period of nine months after the
Distribution Date, the Parent will not directly or indirectly, including by
way of acquisition of other companies, engage in the Internet online auction
business in substantially the same manner and format as conducted by the
Company on the date of the Separation and Distribution Agreement (the "Company
Business"). The Separation and Distribution Agreement also provides for the
allocation of certain corporate opportunities during the period prior to the
Distribution Date. During this period, neither the Company nor the Parent will
have any duty to communicate or offer such opportunities to the other and may
pursue or acquire any such opportunity for itself or direct such opportunity
to any other Person. Except as otherwise contemplated under the intercompany
agreements, it is anticipated that all contracts between the Company and the
Parent after consummation of the Offering will be at arms length.
Expenses. Except as expressly set forth in the Separation and Distribution
Agreement or in any Ancillary Agreement, whether or not the Distribution is
consummated, each party will bear its own respective third-party fees, costs
and expenses paid or incurred in connection with the Distribution.
Parent Stock Options. Options to purchase common stock of the Parent that
are outstanding as of the Distribution Date will, as of the Distribution Date,
become options to purchase shares of both Parent Common Stock and Common Stock
("Adjusted Options"). The number of shares of Common Stock that will be
subject to such Adjusted Options will be based upon the ratio of the number of
shares of uBid Common Stock distributed to the Parent's stockholders in the
Distribution divided by the total number of shares of Parent Common Stock
outstanding on the record date for the Distribution. In addition, the exercise
price for each Adjusted Option will be allocated between the option to
purchase Parent Common Stock and the option to purchase Common Stock based on
the respective pre- and post-Distribution prices of Parent Common Stock and
Common Stock on the Nasdaq National Market. The options to purchase uBid
Common Stock covered by the Adjusted Options will be issued under the
Company's 1998 Stock Incentive Plan. As of March 26, 1999, there were
outstanding options to purchase 777,051 shares of Parent Common Stock. Based
on the number of shares of Parent Common Stock and options to purchase Parent
Common Stock outstanding on March 26, 1999 and the number of shares of Common
Stock outstanding on such date, options to purchase approximately 548,935
shares of uBid Common Stock would be granted in connection with Adjusted
Options.
Termination. The Separation and Distribution Agreement may be terminated at
any time prior to the Distribution Date by the mutual consent of the Parent
and the Company. In the event of any termination of the Separation and
Distribution Agreement, only the provisions of the Separation and Distribution
Agreement that obligate the parties to pursue the Distribution, or take, or
refrain from taking, actions which would or might prevent the Distribution
from qualifying for tax-free treatment under Section 355 of the Code, will
terminate, and the other provisions of the Separation and Distribution
Agreement and each Ancillary Agreement will remain in full force and effect.
Services Agreement
In December 1998, the Company and the Parent entered into a services
agreement (the "Services Agreement") pursuant to which the Parent provides to
the Company various administrative services, including general accounting
services, credit services and payroll and benefits administration. The
following services will be provided by the Parent until the Distribution is
consummated.
General Accounting Services. Pursuant to the Services Agreement, the Parent
provides uBid with accounts payable services and general ledger services. The
services are provided on a cost-plus 10% basis.
Credit Services. The Services Agreement also provides for the provision by
the Parent to uBid of credit services, including full credit checking and
analysis at a cost to uBid of $1.50 per transaction. The Parent will undertake
to use its best efforts to process each credit check within 24 hours of
receipt of the Company's request.
Payroll and Benefits Administration. Under the Services Agreement, the
Parent administers uBid's payroll and uBid's employees are covered under the
Parent's health insurance plan and participate in the Parent's 401(k)
16
<PAGE>
plan. The Company reimburses the Parent for all payroll and benefits costs,
and the Parent receives a monthly servicing fee on a cost-plus 10% basis per
covered or participating employee.
Payments pursuant to the Service Agreement are made monthly in arrears
within 30 days after the Company's receipt of an invoice detailing the
services rendered. The Company believes that the fees for services to be
provided under the Services Agreement are no less favorable to the Company
than could have been obtained by the Company from unaffiliated third parties.
Any services rendered to the Company by the Parent beyond the services to
be provided under the terms of the Services Agreement that the Parent
determines are not covered by the fees provided for under the terms of the
Services Agreement will be billed to the Company as described in the Services
Agreement, or on such other basis as the Company and the Parent may agree,
provided that the price payable by the Company for non-covered services will
be established on a negotiated basis which is no less favorable to the Company
than the charges for comparable services from unaffiliated third parties.
Termination of the Services Agreement at Distribution. The Company and the
Parent expect that, as of the Distribution Date, the Services Agreement will
be terminated and the Parent will no longer perform the transactional and
administrative services described above and certain other services
historically performed by the Parent. The Company anticipates that, after the
Distribution, it will have to engage third parties to perform such services or
perform such services internally by Company personnel. The Company believes
that it will be able to make the transition to internal and third party
administration and transaction processing without significant additional
expense or disruption of the Company's business; however, because the Company
has historically relied heavily on the Parent for such services, no assurance
can be given that the transition will not cause the Company to experience
interruptions or temporary delays in the Company's operations and its ability
to process customer transactions and ship products on a timely basis.
Tax Indemnification and Allocation Agreement
The Company and the Parent have entered into a Tax Indemnification and
Allocation Agreement, which provides that if any one of certain events occurs,
and such event causes the Distribution not to be a tax-free transaction to the
Parent under Section 355 of the Code, then the Company will indemnify the
Parent for income taxes the Parent may incur by reason of the Distribution not
so qualifying under the Code (the "Distribution Taxes"). Such events include
any breach of representations relating to the Company's activities and
ownership of its capital stock made to the Parent or in connection with the
PwC Opinion or any solicitation of a Letter Ruling. In connection with the
Distribution, confirmation of the PwC Opinion at the time of the Distribution
and any Letter Ruling, the Company will likely make certain representations
regarding its intentions at the time of the Distribution with respect to its
business.
The Tax Indemnification and Allocation Agreement also provides that the
Parent will indemnify the Company for Distribution Taxes for which the Company
has no liability to the Parent under the circumstances described above.
In addition to the foregoing indemnities, the Tax Indemnification and
Allocation Agreement provides for: (i) the allocation and payment of taxes for
periods during which the Company and the Parent are included in the same
consolidated group for federal income tax purposes or the same consolidated,
combined or unitary returns for state tax purposes; (ii) the allocation of
responsibility for the filing of tax returns; (iii) the conduct of tax audits
and the handling of tax controversies; and (iv) various related matters.
For periods during which the Company is included in the Parent's
consolidated federal income tax returns or state consolidated, combined, or
unitary tax returns (which will include the periods on or before the
Distribution Date), the Company will be required to pay an amount of income
tax equal to the amount it would have paid had it filed its tax return as a
separate entity, except in cases where the consolidated or combined group as a
whole realizes a detriment from consolidation or combination. The Company will
be responsible for
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<PAGE>
its own separate tax liabilities that are not determined on a consolidated or
combined basis. The Company will also be responsible in the future for any
increases to the consolidated tax liability of the Company and the Parent that
is attributable to the Company, and will be entitled to refunds for reductions
of tax liabilities attributable to the Company for prior periods.
The Company will be included in the Parent's consolidated group for federal
income tax purposes so long as the Parent beneficially owns at least 80% of
the total voting power and value of the outstanding Common Stock. Each
corporation that is a member of a consolidated group during any portion of the
group's tax year is jointly and severally liable for the federal income tax
liability of the group for that year. While the Tax Indemnification and
Allocation Agreement allocates tax liabilities between Company and the Parent
during the period on or prior to the Distribution Date in which the Company is
included in the Parent's consolidated group, the Company could be liable in
the event federal tax liability allocated to the Parent is incurred, but not
paid, by the Parent or any other member of the Parent's consolidated group for
the Parent's tax years that include such periods. In such event, the Company
would be entitled to seek indemnification from the Parent pursuant to the Tax
Indemnification and Allocation Agreement.
As a condition to the Parent effecting the Distribution, the Company will
be required to indemnify the Parent for any tax liability suffered by the
Parent arising out of actions by the Company after the Distribution that would
cause the Distribution to lose its qualification as a tax-free distribution or
to be taxable to the Parent for federal income tax purposes under Section 355
of the Code. For example, Section 355 generally provides that a company that
distributes shares of a subsidiary in a spin-off that is otherwise tax-free
will incur U.S. federal income tax liability if 50% or more, by vote or value,
of the capital stock of either the company making the distribution or the
subsidiary is acquired by one or more persons acting pursuant to a plan or
series of related transactions that include the spin-off. To ensure that
issuances of equity securities by the Company will not cause the Distribution
to be taxable to the Parent, the Tax Indemnification and Allocation Agreement
contains certain restrictions on issuances of equity securities of the Company
and its repurchase of equity securities until three years following the
Distribution Date (the "Restriction Period"). Until the second anniversary of
the Distribution Date, the Company cannot issue Common Stock and other equity
securities (including the shares sold in the Offering) that would cause the
number of shares of Common Stock distributed by the Parent in the Distribution
to constitute less than 60% of the outstanding shares of Common Stock unless
the Company first obtains either the consent of the Parent or a favorable IRS
letter ruling that the issuance will not affect the tax-free status of the
Distribution. After this period until the end of the third year from the
Distribution Date, the Company cannot issue Common Stock and other equity
securities that, when combined with equity securities sold in and after the
Offering would cause the number of shares of Common Stock distributed by the
Parent in the Distribution to constitute less than 55% of the outstanding
shares of Common Stock unless the Company first obtains the consent of the
Parent or a favorable IRS letter or opinion of tax counsel that the issuance
would not affect the tax-free status of the Distribution. These restrictions
on the issuance of equity securities may impede the ability of the Company to
raise necessary capital or to complete acquisitions, if any, using equity
securities. The foregoing prohibitions do not apply to issuances of debt
securities of the Company that are not convertible into Common Stock or other
equity securities. The same requirements for an IRS ruling, consent of the
Parent or an opinion of counsel are applicable to any proposed repurchases of
Common Stock during the Restriction Period. In the event that the Company is
required to indemnify and reimburse the Parent for any tax liability incurred
by the Parent arising out of the Distribution, such indemnification and
reimbursement would have a material adverse effect on the business, results of
operations and financial condition of the Company.
Joint Marketing Agreement
The Company and the Parent have entered into a joint marketing agreement
(the "Marketing Agreement"), pursuant to which the Parent and the Company
agreed to continue certain joint marketing efforts presently in place. The
Marketing Agreement provides that the Company will continue to be presented on
the home page of the Parent's "PC Mall" Website on at least one quarter of the
page as well as receive a banner advertisement on the home page of the
Parent's "PC Mall" Website. The Marketing Agreement provides that uBid will
provide
18
<PAGE>
to the Parent a button that "clicks through" from the home page of the
Company's Website to the Parent's "PC Mall" Website. As consideration for
these marketing services, the Company will either make a payment of $10,000
per month to the Parent or the Parent, in its sole discretion, may elect to
receive a banner advertisement on each page of the Company's Website in lieu
of the monthly payment. The Marketing Agreement has a term of one year and is
terminable by either party upon 60 days prior written notice.
Internet/Telecommunications Agreement
The Company and the Parent have also entered into an
Internet/telecommunications agreement (the "Internet/Telecommunications
Agreement") pursuant to which the Parent will continue to provide the Company
with certain Internet and telecommunications services, including hosting the
Company's Website. The Company agreed to reimburse the Parent for all
telecommunications charges (other than personnel charges), as well as pay
additional monthly personnel charges on a cost-plus 10% basis and capital
equipment charges based on standard lease rates. The
Internet/Telecommunications Agreement has an initial term of one year and is
cancelable, at the option of either party, upon 90 days prior written notice,
provided that, upon such cancellation, the Company will be required to
purchase all capital equipment from the Parent at its depreciated book value.
Sublease Agreement
In July 1998, the Company and the Parent entered into a sublease currently
covering 100,000 square feet of the Parent's 325,000 square foot distribution
center in Memphis, Tennessee. The sublease provides for the Company's
continued use of the Parent's sophisticated inventory control and shipping
systems during the term of the sublease. The sublease is at a monthly rate
equal to the Parent's obligations to the landlord, plus taxes and utilities,
and will expire in 2002.
Other Relationships with the Parent
As of March 31, 1999 the Parent owned 7,329,883 shares of Common Stock,
which represents approximately 80.1% of the voting power of all outstanding
shares of Common Stock. Frank F. Khulusi, a director of the Company, also is
the Chairman, President and Chief Executive Officer of the Parent.
Parent Credit Agreement. The Parent is party to a credit agreement pursuant
to which it has a credit facility of up to $60 million. Under the credit
agreement, each of the Parent's subsidiaries, including the Company, is
required to guarantee the Parent's obligations and to grant the lender a
security interest in its assets to secure the obligations under the guaranty.
The lender has signed a letter consenting to the Distribution and releasing
the Company's guaranty obligations and the lender's security interest in the
Company's assets. In connection with obtaining the lender's consent thereto,
the Company and the Parent have entered into an agreement with the lender that
provides that, through the Distribution Date, neither the Company nor the
Parent will make certain transfers to each other of their respective assets
which might impair the effectiveness or enforceability of the lender's
security interest in assets of the Parent.
Payable to Parent. Since April 1, 1997 ("Inception") the Parent has
provided the funds to finance the Company's operations in the form of advances
that bear interest at the prime rate. The Company had amounts due to the
Parent for working capital and fixed asset purchases (the "Payable") 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.
Advances made by the Parent after the first quarter of 1999, if any, will be
repaid within the respective quarter.
19
<PAGE>
PROPOSAL TWO
APPROVAL OF 1998 STOCK INCENTIVE PLAN
The Company's stockholders are being asked to approve the Company's 1998
Stock Incentive Plan. The Plan was initially adopted on August 30, 1998 by the
Company's Board of Directors and the Parent, as sole stockholder of the
Company. The Plan is intended to enhance the Company's ability to provide key
individuals with awards and incentives commensurate with their contributions
and competitive with those offered by other employers, and to increase
shareholder value by further aligning the interests of key individuals with
the interests of the Company's stockholders by providing an opportunity to
benefit from stock price appreciation that generally accompanies improved
financial performance. The Board of Directors believes that the Company's long
term success is dependent upon the ability of the Company to attract and
retain highly qualified individuals who, by virtue of their ability and
qualifications, make important contributions to the Company.
The Plan is being submitted to stockholders in an effort to assure that
awards under the Plan will be tax deductible by the Company. Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), places a $1
million limit on the amount of compensation paid to certain of the Company's
executive officers that may be deducted by the Company for federal income tax
purposes, unless such compensation is based on the achievement of pre-
established performance goals set by a committee comprised of two or more
"outside directors" pursuant to an incentive plan that has been approved by
the Company's stockholders. Additionally, stock options will qualify for the
performance-based exception where, among other requirements, the exercise
price of the option is not less than the fair market value of the stock on the
date of grant, and the plan includes a per-executive limitation on the number
of shares for which options may be granted during a specified period. The Plan
includes features intended to provide for the grant of awards that will
qualify as "performance based" compensation. Stockholder approval of the Plan
is necessary for maintaining the tax-deductible status of incentive awards
made to key executives under the Plan, as well as to allow the Company to
recognize and award key executives for their contributions to the success of
the Company.
General Description
The Plan was initially approved by the Board of Directors and sole
stockholder in August 1998. In January and February 1999, the Board of
Directors approved amendments to the Plan to (i) expand the definition of
"consultant" under the Plan and (ii) to give the Plan Administrator (as
defined below) discretion to provide in any particular Award Agreement for
accelerated vesting of options upon a sale, merger or change of control of the
Company.
The purposes of the Plan are to give the Company's employees and others who
perform substantial services to the Company an incentive, through ownership of
the Company's Common Stock, to continue in service to the Company, and to help
the Company compete effectively with other enterprises for the services of
qualified individuals. The Plan permits the grant of "incentive stock options"
("ISOs") within the meaning of Section 422 of the Code only to employees of
the Company or any parent or subsidiary of the Company. Awards other than
incentive stock options may be granted to employees, directors and consultants
of the Company and its parents, subsidiaries, and other businesses in which
the Company, a subsidiary or a parent holds a substantial interest ("Related
Entities"). As of March 31, 1999, options to purchase a total of 316,325
shares held by 41 optionees were outstanding as of such date at a weighted
average exercise price of $69.53 per share, and 1,516,145 shares remained
available for future grant under the Plan. As of that same date, the number of
employees, directors and consultants of the Company eligible to receive grants
under the Plan was approximately 62 persons, which includes all of the
Company's current directors and executive officers. The closing price of the
Company's Common Stock as reported on the Nasdaq National Market on April 14,
1999 was $58.50.
The Plan provides for the grant of (i) shares, (ii) options, stock
appreciation rights ("SARs") or similar rights with an exercise or conversion
privilege at a fixed or variable price related to the Common Stock and/or the
passage of time, the occurrence of one or more events, or the satisfaction of
performance criteria or other
20
<PAGE>
conditions, or (iii) any other security with the value derived from the value
of the Common Stock of the Company (collectively, the "Awards"). Such Awards
include, without limitation, options, SARs, sales or bonuses of restricted
stock, dividend equivalent rights ("DERs"), performance units ("Performance
Units"), performance shares ("Performance Shares"), or a combination of such
securities and benefits.
An aggregate of 1,832,470 shares of Common Stock are reserved for issuance
under the Plan. Beginning in January 2000 and on the first business day of
each calendar year thereafter, the maximum aggregate number of shares of
Common Stock available under the Plan will be increased by three percent (3%)
of the number of shares of Common Stock outstanding as of December 31 of the
preceding calendar year. The maximum aggregate number of shares available for
grant of incentive stock options under the Plan is 476,442, which number will
not be subject to such annual adjustment. The maximum number of shares of
Common Stock with respect to which stock options and stock appreciation rights
may be granted to any employee in any fiscal year is 366,494 shares.
Administration
The Plan is administered, with respect to grants to directors, officers,
consultants, and other employees, by the "Administrator" of the Plan, defined
as the Board or a committee designated by the Board. The committee is
constituted in such a manner as to satisfy applicable laws, including Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as amended ("Rule
16b-3"). With respect to Awards subject to Code Section 162(m), the committee
will be comprised solely of two or more "outside directors" as defined under
Code Section 162(m) and applicable tax regulations. For grants of Awards to
individuals not subject to Rule 16b-3 and Code Section 162(m), the Board of
Directors may authorize one or more officers to grant such Awards.
Amendment and Termination
The Board may at any time amend, suspend or terminate the Plan. To the
extent necessary to comply with applicable provisions of federal securities
laws, state corporate and securities laws, the Code, the rules of any
applicable stock exchange or national market system, and the rules of any
foreign jurisdiction applicable to Awards granted to residents therein, the
Company will obtain stockholder approval of any amendment to the Plan in such
a manner and to such a degree as required. The Plan will terminate in August
2008 unless previously terminated by the Board of Directors.
Other Terms of the Plan
Stock options granted under the Plan may be either incentive stock options
under the provisions of Section 422 of the Code, or non-qualified stock
options. Incentive stock options may be granted only to employees of the
Company or any parent or subsidiary of the Company. Awards other than
incentive stock options may be granted to employees, directors and consultants
of the Company or a Related Entity.
The Plan authorizes the Administrator to select the employees, directors
and consultants of the Company to whom Awards may be granted and to determine
the terms and conditions of any Award; however, the term of an incentive stock
option may not be for more than 10 years (or 5 years in the case of incentive
stock options granted to any grantee who owns stock representing more than 10%
of the combined voting power of the Company or any parent or subsidiary
corporation of the Company). The Plan authorizes the Administrator to grant
Awards at an exercise price determined by the Administrator. In the case of
incentive stock options, such price cannot be less than 100% (or 110%, in the
case of incentive stock options granted to any grantee who owns stock
representing more than 10% of the combined voting power of the Company or any
parent or subsidiary corporation of the Company) of the fair market value of
the Common Stock on the date the option is granted. In the case of non-
qualified stock options, the exercise price cannot be less than 85% of the
fair market value of the Common Stock on the date of grant unless otherwise
determined by the Administrator. The exercise price of Awards intended to
qualify as performance-based compensation for purposes of Code Section 162(m)
21
<PAGE>
shall not be less than 100% of the fair market value. The exercise price is
generally payable in cash or, in certain circumstances, with a promissory
note, assignment of a part of the proceeds from the sale of shares acquired
upon exercise or purchase of the Award, or with shares of Common Stock. The
aggregate fair market value of the Common Stock with respect to any incentive
stock options that are exercisable for the first time by an eligible employee
in any calendar year may not exceed $100,000. If the aggregate fair market
value of such options exceeds $100,000, such options will be treated as non-
qualified stock options to the extent of such excess.
Under the Plan, incentive stock options may not be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or
by the laws of descent or distribution and may be exercised during the
lifetime of the grantee only by the grantee. However, the Plan permits the
designation of beneficiaries by holders of incentive stock options. Other
Awards shall be transferable to the extent provided in the Award agreement.
The Administrator may establish one or more programs under the Plan to
permit selected grantees the opportunity to elect to defer receipt of
consideration payable under an Award. The Administrator also may establish
under the Plan separate programs for the grant of particular forms of Awards
to one or more classes of grantees.
Corporate Transactions, Changes in Control and Related Entity Dispositions
Corporate Transactions. In the event of an acquisition of the Company
through the sale of all or substantially all of its assets, a merger or other
business combination in which the Company is not the surviving entity (a
"Corporate Transaction"), outstanding Awards under the Plan terminate unless
assumed by the successor company or its parent. However, an Award Agreement
may provide that all or a portion of the unvested Award covered by such Award
Agreement will become vested and exercisable and be released from any
restrictions on transfer (other than transfer restrictions applicable to ISOs)
and repurchase or forfeiture rights, immediately prior to the effective date
of the Corporate Transaction. The terms and conditions of such acceleration
and release shall be determined in the Administrator's sole discretion and
shall be fully set forth in the Award Agreement.
Changes in Control. An Award Agreement may provide that, in the event of
(1) a transaction resulting in the direct or indirect acquisition by any
person or related group of persons of beneficial ownership of more than fifty
percent (50%) of the total combined voting power of the Company's outstanding
securities pursuant to a tender or exchange offer in which a majority of the
Company's disinterested continuing directors do not recommend such
transaction, or (2) a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Board members
ceases to be comprised of individuals who are continuing directors (a "Change
in Control"), all or a portion of the unvested Award covered by such Award
Agreement will become vested and exercisable and be released from any
restrictions on transfer (other than transfer restrictions applicable to ISOs)
and repurchase or forfeiture rights, immediately prior to the effective date
of the Change in Control. The terms and conditions of such acceleration and
release shall be determined in the Administrator's sole discretion and shall
be fully set forth in the Award Agreement.
Related Entity Dispositions. In the case of a sale, distribution or other
disposition by the Company of all or substantially all of the Company's
interests in a Related Entity effected by means of a sale, merger,
consolidation or other transaction involving the Related Entity or the sale of
all or substantially all of the assets of the Related Entity (a "Related
Entity Disposition"), the continuous service of each participant who is at the
time engaged primarily in service related to such Related Entity shall
terminate unless such Awards are assumed by the successor entity or its
parent. However, an Award Agreement may provide that all or a portion of the
unvested Award covered by such Award Agreement will become vested and released
from any restrictions on transfer (other than transfer restrictions applicable
to ISOs) and repurchase or forfeiture rights and shall be exercisable in
accordance with the terms of the Award Agreement. The terms and conditions of
such acceleration and release shall be determined in the Administrator's sole
discretion and shall be fully set forth in the Award Agreement.
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<PAGE>
Other Acceleration. An Award Agreement may provide for other acceleration
of vesting and exercisability, and release from any restrictions on transfer
(other than transfer restrictions applicable to ISOs) and repurchase or
forfeiture rights ("Other Acceleration"), of an Award covered by such Award
Agreement in addition to those set forth above. The terms and conditions of
such acceleration and release shall be determined in the Administrator's sole
discretion and shall be fully set forth in the Award Agreement.
Discretion of Plan Administrator. Notwithstanding the above, the
Administrator may, in its discretion, prevent the acceleration and vesting and
release of restrictions on transfer and repurchase or forfeiture rights of any
outstanding Award with respect to any Corporate Transaction, Change of
Control, Related Entity Disposition or Other Acceleration provisions.
Certain Federal Tax Consequences
The grant of a non-qualified stock option under the Plan will not result in
any federal income tax consequences to the optionee or to the Company. Upon
exercise of a non-qualified stock option, the optionee is subject to income
taxes at the rate applicable to ordinary compensation income on the difference
between the option exercise price and the fair market value of the shares on
the date of exercise. This income is subject to withholding for federal income
and employment tax purposes. The Company is entitled to an income tax
deduction in the amount of the income recognized by the optionee. Any gain or
loss on the optionee's subsequent disposition of the shares of Common Stock
will receive long or short-term capital gain or loss treatment, depending on
whether the shares are held for more than one year following exercise. The
Company does not receive a tax deduction for any such gain. Capital gains
currently are taxed at the same rates as ordinary income, except that the
maximum marginal rate at which ordinary income is taxed to individuals is
currently 39.6% and the maximum rate at which long-term capital gains are
taxed is 28%. The maximum rate at which long-term capital gains are taxed
currently falls to 20% for most types of property held for more than eighteen
months.
The grant of an incentive stock option under the Plan will not result in
any federal income tax consequences to the optionee or to the Company. An
optionee recognizes no federal taxable income upon exercising an incentive
stock option (subject to the alternative minimum tax rules discussed below),
and the Company receives no deduction at the time of exercise. In the event of
a disposition of stock acquired upon exercise of an ISO, the tax consequences
depend upon how long the optionee has held the shares of Common Stock. If the
optionee does not dispose of the shares within two years after the ISO was
granted, nor within one year after the ISO was exercised, the optionee will
recognize a long-term capital gain (or loss) equal to the difference between
the sale price of the shares and the exercise price. The Company is not
entitled to any deduction under these circumstances.
If the optionee fails to satisfy either of the foregoing holding periods,
he or she must recognize ordinary income in the year of the disposition
(referred to as a "disqualifying disposition"). The amount of such ordinary
income generally is the lesser of (i) the difference between the amount
realized on the disposition and the exercise price, or (ii) the difference
between the fair market value of the stock on the exercise date and the
exercise price. Any gain in excess of the amount taxed as ordinary income will
be treated as a long or short-term capital gain, depending on whether the
stock was held for more than one year. The Company, in the year of the
disqualifying disposition, is entitled to a deduction equal to the amount of
ordinary income recognized by the optionee.
The "spread" under an ISO--i.e., the difference between the fair market
value of the shares at exercise and the exercise price--is classified as an
item of adjustment in the year of exercise for purposes of the alternative
minimum tax.
The grant of restricted stock will subject the recipient to ordinary
compensation income on the difference between the amount paid for such stock
and the fair market value of the shares on the date that the restrictions
lapse. This income is subject to withholding for federal income and employment
tax purposes. The Company is entitled to an income tax deduction in the amount
of the ordinary income recognized by the recipient. Any gain
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<PAGE>
or loss on the recipient's subsequent disposition of the shares will receive
long or short-term capital gain or loss treatment depending on whether the
shares are held for more than one year and depending on how long the stock has
been held since the restrictions lapsed. The Company does not receive a tax
deduction for any such gain.
Recipients of restricted stock may make an election under Internal Revenue
Code Section 83(b) ("Section 83(b) Election") to recognize as ordinary
compensation income in the year that such restricted stock is granted the
amount equal to the spread between the amount paid for such stock and the fair
market value on the date of the issuance of the stock. If such an election is
made, the recipient recognizes no further amounts of compensation income upon
the lapse of any restrictions and any gain or loss on subsequent disposition
will be long or short-term capital gain to the recipient. The Section 83(b)
Election must be made within thirty days from the time the restricted stock is
issued.
The foregoing is only a summary of the current effect of federal income
taxation upon the grantee and the Company with respect to the shares purchased
under the Plan. Reference should be made to the applicable provisions of the
Code. In addition, the summary does not discuss the tax consequences of a
grantee's death or the income tax laws of any municipality, state or foreign
country to which the grantee may be subject.
The affirmative vote of a majority of the shares present in person or by
proxy at the Annual Meeting is required for the approval of the Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE uBID, INC.
1998 STOCK INCENTIVE PLAN.
New Plan Benefits
The table below sets forth the number of options granted under the Plan as
of March 31, 1999 to certain specified groups of individuals.
<TABLE>
<CAPTION>
Number of Shares
Name and Position Underlying Options
----------------- ------------------
<S> <C>
All current directors who are not executive officers
(one person)........................................... 18,325
All employees, including current officers who are not
executive officers (40 persons)........................ 288,000
</TABLE>
Pursuant to the Separation and Distribution Agreement, options to purchase
common stock of the Parent outstanding as of the Distribution Date will be
converted into options to purchase both Parent Common Stock and Company Common
Stock. Based on the number of shares of Parent Common Stock and options to
purchase Parent Common Stock outstanding on March 26, 1999, the Company
anticipates that it will grant options to purchase approximately 548,935
shares of the Company's Common Stock under the Plan in connection with the
Distribution. See "Certain Relationships and Related Transactions--Separation
and Distribution Agreement." The amounts and terms of future Awards to be
granted under the Plan to any eligible participant lie within the authority
and discretion of the Board of Directors and the Plan Administrator and are
not determinable at this time. Information with respect to grants of stock
options to certain of the Company's directors and executive officers under the
Company's informal stock option plan appears under the headings "Compensation
of Directors" and "Executive Compensation" herein.
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PROPOSAL THREE
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Ernst & Young LLP has served as the independent auditors of the Company
since the inception of the Company in 1997 and has been appointed by the Board
of Directors to continue as the independent auditors of the Company for the
year ending December 31, 1999. In the event that ratification of this
selection of auditors is not approved by a majority of the shares of Common
Stock voting at the Annual Meeting in person or by proxy, the Board of
Directors will review its future selection of auditors. A representative of
Ernst & Young LLP is expected to be present at the Annual Meeting, will have
an opportunity to make a statement and will be able to respond to appropriate
questions.
THE BOARD RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF ERNST &
YOUNG LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE YEAR ENDING DECEMBER
31, 1999.
STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING
Stockholders may submit proposals on matters appropriate for stockholder
action at subsequent annual meetings of the Company consistent with Rule 14a-8
promulgated under the Exchange Act. Proposals of stockholders intended to be
presented at the Company's 2000 Annual Meeting of Stockholders must be
received by the Company (Attention: Chief Financial Officer, at the principal
offices of the Company), no later than December 28, 1999, for inclusion in the
Company's proxy statement and form of proxy for that meeting. In order for a
stockholder proposal not intended to be subject to Rule 14a-8 (and thus not
subject to inclusion in the Company's Proxy Statement) to be considered
"timely" within the meaning of Rule 14a-4 under the Exchange Act and pursuant
to the Company's Bylaws, notice of any such stockholder proposals must be
given to the Company in writing not less than 45 days nor more than 75 days
prior to the date on which the Company first mailed its proxy materials for
the 1999 meeting, which is set forth on page 1 of this Proxy Statement (or the
date on which the Company mails its proxy materials for the 2000 Annual
Meeting if the date of that meeting is changed more than 30 days from the
prior year). A stockholder's notice to the Company must set forth for each
matter proposed to be brought before the annual meeting (a) a brief
description of the matter the stockholder proposes to bring before the meeting
and the reasons for conducting such business at the meeting, (b) the name and
recent address of the stockholder proposing such business, (c) the class and
number of shares of the Company which are beneficially owned by the
stockholder, and (d) any material interest of the stockholder in such
business. With respect to proposals by stockholders for director nominations,
the Company's Bylaws require written notice to be received by the Company not
less than 30 days nor more than 60 days before the meeting, unless less than
40 days' notice or public disclosure of the meeting is given, in which case
the stockholder's notice must be received within 10 days after such notice or
disclosure is given. The notice must contain specified information about the
proposed nominee and the stockholder making the nomination.
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<PAGE>
OTHER BUSINESS
The Board of Directors is not aware of any other matters to come before the
Annual Meeting. If any matter not mentioned herein is properly brought before
the meeting, the persons named in the enclosed proxy will have discretionary
authority to vote all proxies with respect thereto in accordance with their
judgment.
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1998 AS FILED WITH THE SEC WILL BE PROVIDED TO STOCKHOLDERS
WITHOUT CHARGE UPON WRITTEN REQUEST TO uBID, INC., 2525 BUSSE ROAD, ELK GROVE
VILLAGE, ILLINOIS 60007, ATTENTION: CHIEF FINANCIAL OFFICER.
By Order of the Board of Directors
Frank F. Khulusi
Secretary
April 26, 1999
26
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[MAP APPEARS HERE]
<PAGE>
ANNEX A
uBID, INC.
1998 STOCK INCENTIVE PLAN
1. Purposes of the Plan. The purposes of this Stock Incentive Plan are to
attract and retain the best available personnel, to provide additional
incentive to Employees, Directors and Consultants and to promote the success
of the Company's business.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of the Committees appointed
to administer the Plan.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.
(c) "Applicable Laws" means the legal requirements relating to the
administration of stock incentive plans, if any, under applicable
provisions of federal securities laws, state corporate and securities laws,
the Code, the rules of any applicable stock exchange or national market
system, and the rules of any foreign jurisdiction applicable to Awards
granted to residents therein.
(d) "Award" means the grant of an Option, SAR, Dividend Equivalent
Right, Restricted Stock, Performance Unit, Performance Share, or other
right or benefit under the Plan.
(e) "Award Agreement" means the written agreement evidencing the grant
of an Award executed by the Company and the Grantee, including any
amendments thereto.
(f) "Board" means the Board of Directors of the Company.
(g) "Cause" means, with respect to the termination by the Company or a
Related Entity of the Grantee's Continuous Service, that such termination
is for "Cause" as such term is expressly defined in a then-effective
written agreement between the Grantee and the Company or such Related
Entity, or in the absence of such then-effective written agreement and
definition, is based on, in the determination of the Administrator, the
Grantee's: (i) refusal or failure to act in accordance with any specific,
lawful direction or order of the Company or a Related Entity; (ii)
unfitness or unavailability for service or unsatisfactory performance
(other than as a result of Disability); (iii) performance of any act or
failure to perform any act in bad faith and to the detriment of the Company
or a Related Entity; (iv) dishonesty, intentional misconduct or material
breach of any agreement with the Company or a Related Entity; or (v)
commission of a crime involving dishonesty, breach of trust, or physical or
emotional harm to any person. At least 30 days prior to the termination of
the Grantee's Continuous Service pursuant to (i) or (ii) above, the
Administrator shall provide the Grantee with notice of the Company's or
such Related Entity's intent to terminate, the reason therefor, and an
opportunity for the Grantee to cure such defects in his or her service to
the Company's or such Related Entity's satisfaction. During this 30 day (or
longer) period, no Award issued to the Grantee under the Plan may be
exercised or purchased.
(h) "Change in Control" means a change in ownership or control of the
Company effected through either of the following transactions:
(i) the direct or indirect acquisition by any person or related group
of persons (other than an acquisition from or by the Company or by a
Company-sponsored employee benefit plan or by a person that directly or
indirectly controls, is controlled by, or is under common control with,
the Company) of beneficial ownership (within the meaning of Rule 13d-3
of the Exchange Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding
securities pursuant to a tender or exchange offer made directly to the
Company's stockholders which a majority of the Continuing Directors who
are not Affiliates or Associates of the offeror do not recommend such
stockholders accept, or
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(ii) a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Board
members (rounded up to the next whole number) ceases, by reason of one
or more contested elections for Board membership, to be comprised of
individuals who are Continuing Directors.
(i) "Code" means the Internal Revenue Code of 1986, as amended.
(j) "Committee" means any committee appointed by the Board to administer
the Plan.
(k) "Common Stock" means the common stock of the Company.
(l) "Company" means uBid, Inc., a Delaware corporation.
(m) "Consultant" means any person (other than an Employee or, solely
with respect to rendering services in such person's capacity as a Director)
who is engaged by the Company or any Related Entity to render consulting,
advisory or other services to the Company or such Related Entity.
(n) "Continuing Directors" means members of the Board who either (i)
have been Board members continuously for a period of at least thirty-six
(36) months or (ii) have been Board members for less than thirty-six (36)
months and were elected or nominated for election as Board members by at
least a majority of the Board members described in clause (i) who were
still in office at the time such election or nomination was approved by the
Board.
(o) "Continuous Service" means that the provision of services to the
Company or a Related Entity in any capacity of Employee, Director or
Consultant, is not interrupted or terminated. Continuous Service shall not
be considered interrupted in the case of (i) any approved leave of absence,
(ii) transfers between locations of the Company or among the Company, any
Related Entity, or any successor, in any capacity of Employee, Director or
Consultant, or (iii) any change in status as long as the individual remains
in the service of the Company or a Related Entity in any capacity of
Employee, Director or Consultant (except as otherwise provided in the Award
Agreement). An approved leave of absence shall include sick leave, military
leave, or any other authorized personal leave. For purposes of Incentive
Stock Options, no such leave may exceed ninety (90) days, unless
reemployment upon expiration of such leave is guaranteed by statute or
contract.
(p) "Corporate Transaction" means any of the following transactions:
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of
which is to change the state in which the Company is incorporated;
(ii) the sale, transfer or other disposition of all or substantially
all of the assets of the Company (including the capital stock of the
Company's subsidiary corporations) in connection with the complete
liquidation or dissolution of the Company;
(iii) any reverse merger in which the Company is the surviving
entity but in which securities possessing more than fifty percent (50%)
of the total combined voting power of the Company's outstanding
securities are transferred to a person or persons different from those
who held such securities immediately prior to such merger; or
(iv) an acquisition by any person or related group of persons (other
than the Company or by a Company-sponsored employee benefit plan) of
beneficial ownership (within the meaning of Rule 13d-3 of the Exchange
Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities
(whether or not in a transaction also constituting a Change in
Control), but excluding any such transaction that the Administrator
determines shall not be a Corporate Transaction.
(q) "Covered Employee" means an Employee who is a "covered employee"
under Section 162(m)(3) of the Code.
(r) "Director" means a member of the Board or the board of directors of
any Related Entity.
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(s) "Disability" means that a Grantee is permanently unable to carry out
the responsibilities and functions of the position held by the Grantee by
reason of any medically determinable physical or mental impairment. A
Grantee will not be considered to have incurred a Disability unless he or
she furnishes proof of such impairment sufficient to satisfy the
Administrator in its discretion.
(t) "Dividend Equivalent Right" means a right entitling the Grantee to
compensation measured by dividends paid with respect to Common Stock.
(u) "Employee" means any person, including an Officer or Director, who
is an employee of the Company or any Related Entity. The payment of a
director's fee by the Company or a Related Entity shall not be sufficient
to constitute "employment" by the Company.
(v) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(w) "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(i) Where there exists a public market for the Common Stock, the Fair
Market Value shall be (A) the closing price for a Share for the last
market trading day prior to the time of the determination (or, if no
closing price was reported on that date, on the last trading date on
which a closing price was reported) on the stock exchange determined by
the Administrator to be the primary market for the Common Stock or the
Nasdaq National Market, whichever is applicable or (B) if the Common
Stock is not traded on any such exchange or national market system, the
average of the closing bid and asked prices of a Share on the Nasdaq
Small Cap Market for the day prior to the time of the determination (or,
if no such prices were reported on that date, on the last date on which
such prices were reported), in each case, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable; or
(ii) In the absence of an established market for the Common Stock of
the type described in (i), above, the Fair Market Value thereof shall be
determined by the Administrator in good faith.
(x) "Grantee" means an Employee, Director or Consultant who receives an
Award pursuant to an Award Agreement under the Plan.
(y) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(z) "Non-Qualified Stock Option" means an Option not intended to qualify
as an Incentive Stock Option.
(aa) "Officer" means a person who is an officer of the Company or a
Related Entity within the meaning of Section 16 of the Exchange Act and the
rules and regulations promulgated thereunder.
(bb) "Option" means an option to purchase Shares pursuant to an Award
Agreement granted under the Plan.
(cc) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(dd) "Performance--Based Compensation" means compensation qualifying as
"performance-based compensation" under Section 162(m) of the Code.
(ee) "Performance Shares" means Shares or an Award denominated in Shares
which may be earned in whole or in part upon attainment of performance
criteria established by the Administrator.
(ff) "Performance Units" means an Award which may be earned in whole or
in part upon attainment of performance criteria established by the
Administrator and which may be settled for cash, Shares or other securities
or a combination of cash, Shares or other securities as established by the
Administrator.
(gg) "Plan" means this 1998 Stock Incentive Plan.
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(hh) "Related Entity" means any Parent, Subsidiary and any business,
corporation, partnership, limited liability company or other entity in
which the Company, a Parent or a Subsidiary holds a substantial ownership
interest, directly or indirectly. For this purpose of the Non-Qualified
Stock Options to be granted under this Plan pursuant to Section 3.6 of the
Separation and Distribution Agreement to be entered into between the
Company and its parent, Creative Computers, Inc. ("Creative"), "Related
Entity" shall include Creative and its Subsidiaries, notwithstanding that,
at the time of the granting of such Options, the Company may no longer be a
Subsidiary of Creative.
(ii) "Restricted Stock" means Shares issued under the Plan to the
Grantee for such consideration, if any, and subject to such restrictions on
transfer, rights of first refusal, repurchase provisions, forfeiture
provisions, and other terms and conditions as established by the
Administrator.
(jj) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor thereto.
(kk) "SAR" means a stock appreciation right entitling the Grantee to
Shares or cash compensation, as established by the Administrator, measured
by appreciation in the value of Common Stock.
(ll) "Share" means a share of the Common Stock.
(mm) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
(nn) "Related Entity Disposition" means the sale, distribution or other
disposition by the Company of all or substantially all of the Company's
interests in any Related Entity effected by a sale, merger or consolidation
or other transaction involving that Related Entity or the sale of all or
substantially all of the assets of that Related Entity.
3. Stock Subject to the Plan.
(a) The maximum aggregate number of Shares which may be issued pursuant
to Awards initially shall be 2,500,000 Shares, and commencing with the
first business day of each calendar year thereafter beginning with January
1, 2000, such maximum aggregate number of Shares shall be increased by a
number equal to three percent (3%) of the number of Shares outstanding as
of December of the immediately preceding calendar year. Notwithstanding the
foregoing, subject to the provisions of Section 10, below, the maximum
aggregate number of Shares available for grant of Incentive Stock Options
shall be 650,000 Shares, and such number shall not be subject to annual
adjustment as described above. The Shares to be issued pursuant to Awards
may be authorized, but unissued, or reacquired Common Stock.
(b) Any Shares covered by an Award (or portion of an Award) which is
forfeited or canceled, expires or is settled in cash, shall be deemed not
to have been issued for purposes of determining the maximum aggregate
number of Shares which may be issued under the Plan. If any unissued Shares
are retained by the Company upon exercise of an Award in order to satisfy
the exercise price for such Award or any withholding taxes due with respect
to such Award, such retained Shares subject to such Award shall become
available for future issuance under the Plan (unless the Plan has
terminated). Shares that actually have been issued under the Plan pursuant
to an Award shall not be returned to the Plan and shall not become
available for future issuance under the Plan, except that if unvested
Shares are forfeited, or repurchased by the Company at their original
purchase price, such Shares shall become available for future grant under
the Plan.
4. Administration of the Plan.
(a) Plan Administrator.
(i) Administration with Respect to Directors and Officers. With
respect to grants of Awards to Directors or Employees who are also
Officers or Directors of the Company, the Plan shall be administered by
(A) the Board or (B) a Committee designated by the Board, which
Committee shall be constituted in such a manner as to satisfy the
Applicable Laws and to permit such grants and related
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transactions under the Plan to be exempt from Section 16(b) of the
Exchange Act in accordance with Rule 16b-3. Once appointed, such
Committee shall continue to serve in its designated capacity until
otherwise directed by the Board.
(ii) Administration With Respect to Consultants and Other
Employees. With respect to grants of Awards to Employees or Consultants
who are neither Directors nor Officers of the Company, the Plan shall
be administered by (A) the Board or (B) a Committee designated by the
Board, which Committee shall be constituted in such a manner as to
satisfy the Applicable Laws. Once appointed, such Committee shall
continue to serve in its designated capacity until otherwise directed
by the Board. The Board may authorize one or more Officers to grant
such Awards and may limit such authority as the Board determines from
time to time.
(iii) Administration With Respect to Covered
Employees. Notwithstanding the foregoing, grants of Awards to any
Covered Employee intended to qualify as Performance-Based Compensation
shall be made only by a Committee (or subcommittee of a Committee)
which is comprised solely of two or more Directors eligible to serve on
a committee making Awards qualifying as Performance-Based Compensation.
In the case of such Awards granted to Covered Employees, references to
the "Administrator" or to a "Committee" shall be deemed to be
references to such Committee or subcommittee.
(iv) Administration Errors. In the event an Award is granted in a
manner inconsistent with the provisions of this subsection (a), such
Award shall be presumptively valid as of its grant date to the extent
permitted by the Applicable Laws.
(b) Powers of the Administrator. Subject to Applicable Laws and the
provisions of the Plan (including any other powers given to the
Administrator hereunder), and except as otherwise provided by the Board,
the Administrator shall have the authority, in its discretion:
(i) to select the Employees, Directors and Consultants to whom
Awards may be granted from time to time hereunder;
(ii) to determine whether and to what extent Awards are granted
hereunder;
(iii) to determine the number of Shares or the amount of other
consideration to be covered by each Award granted hereunder;
(iv) to approve forms of Award Agreements for use under the Plan;
(v) to determine the terms and conditions of any Award granted
hereunder;
(vi) to amend the terms of any outstanding Award granted under the
Plan, including a reduction in the exercise price (or base amount on
which appreciation is measured) of any Award to reflect a reduction in
the Fair Market Value of the Common Stock since the grant date of the
Award, provided that any amendment that would adversely affect the
Grantee's rights under an outstanding Award shall not be made without
the Grantee's written consent;
(vii) to construe and interpret the terms of the Plan and Awards
granted pursuant to the Plan, including without limitation, any notice
of Award or Award Agreement, granted pursuant to the Plan;
(viii) to establish additional terms, conditions, rules or
procedures to accommodate the rules or laws of applicable foreign
jurisdictions and to afford Grantees favorable treatment under such
laws; provided, however, that no Award shall be granted under any such
additional terms, conditions, rules or procedures with terms or
conditions which are inconsistent with the provisions of the Plan; and
(ix) to take such other action, not inconsistent with the terms of
the Plan, as the Administrator deems appropriate.
(c) Effect of Administrator's Decision. All decisions, determinations
and interpretations of the Administrator shall be conclusive and binding on
all persons.
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5. Eligibility. Awards other than Incentive Stock Options may be granted to
Employees, Directors and Consultants. Incentive Stock Options may be granted
only to Employees of the Company, a Parent or a Subsidiary. An Employee,
Director or Consultant who has been granted an Award may, if otherwise
eligible, be granted additional Awards. Awards may be granted to such
Employees, Directors or Consultants who are residing in foreign jurisdictions
as the Administrator may determine from time to time.
6. Terms and Conditions of Awards.
(a) Type of Awards. The Administrator is authorized under the Plan to
award any type of arrangement to an Employee, Director or Consultant that
is not inconsistent with the provisions of the Plan and that by its terms
involves or might involve the issuance of (i) Shares, (ii) an Option, a SAR
or similar right with a fixed or variable price related to the Fair Market
Value of the Shares and with an exercise or conversion privilege related to
the passage of time, the occurrence of one or more events, or the
satisfaction of performance criteria or other conditions, or (iii) any
other security with the value derived from the value of the Shares. Such
awards include, without limitation, Options, SARs, sales or bonuses of
Restricted Stock, Dividend Equivalent Rights, Performance Units or
Performance Shares, and an Award may consist of one such security or
benefit, or two (2) or more of them in any combination or alternative.
(b) Designation of Award. Each Award shall be designated in the Award
Agreement. In the case of an Option, the Option shall be designated as
either an Incentive Stock Option or a Non-Qualified Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair
Market Value of Shares subject to Options designated as Incentive Stock
Options which become exercisable for the first time by a Grantee during any
calendar year (under all plans of the Company or any Parent or Subsidiary)
exceeds $100,000, such excess Options, to the extent of the Shares covered
thereby in excess of the foregoing limitation, shall be treated as Non-
Qualified Stock Options. For this purpose, Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair
Market Value of the Shares shall be determined as of the date the Option
with respect to such Shares is granted.
(c) Conditions of Award. Subject to the terms of the Plan, the
Administrator shall determine the provisions, terms, and conditions of each
Award including, but not limited to, the Award vesting schedule, repurchase
provisions, rights of first refusal, forfeiture provisions, form of payment
(cash, Shares, or other consideration) upon settlement of the Award,
payment contingencies, and satisfaction of any performance criteria. The
performance criteria established by the Administrator may be based on any
one of, or combination of, increase in share price, earnings per share,
total stockholder return, return on equity, return on assets, return on
investment, net operating income, cash flow, revenue, economic value added,
personal management objectives, or other measure of performance selected by
the Administrator. Partial achievement of the specified criteria may result
in a payment or vesting corresponding to the degree of achievement as
specified in the Award Agreement.
(d) Acquisitions and Other Transactions. The Administrator may issue
Awards under the Plan in settlement, assumption or substitution for,
outstanding awards or obligations to grant future awards in connection with
the Company or a Related Entity acquiring another entity, an interest in
another entity or an additional interest in a Related Entity whether by
merger, stock purchase, asset purchase or other form of transaction.
(e) Deferral of Award Payment. The Administrator may establish one or
more programs under the Plan to permit selected Grantees the opportunity to
elect to defer receipt of consideration upon exercise of an Award,
satisfaction of performance criteria, or other event that absent the
election would entitle the Grantee to payment or receipt of Shares or other
consideration under an Award. The Administrator may establish the election
procedures, the timing of such elections, the mechanisms for payments of,
and accrual of interest or other earnings, if any, on amounts, Shares or
other consideration so deferred, and such other terms, conditions, rules
and procedures that the Administrator deems advisable for the
administration of any such deferral program.
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(f) Award Exchange Programs. The Administrator may establish one or more
programs under the Plan to permit selected Grantees to exchange an Award
under the Plan for one or more other types of Awards under the Plan on such
terms and conditions as determined by the Administrator from time to time.
(g) Separate Programs. The Administrator may establish one or more
separate programs under the Plan for the purpose of issuing particular
forms of Awards to one or more classes of Grantees on such terms and
conditions as determined by the Administrator from time to time.
(h) Individual Option and SAR Limit. The maximum number of Shares with
respect to which Options and SARs may be granted to any Employee in any
fiscal year of the Company shall be five hundred thousand (500,000) Shares.
The foregoing limitation shall be adjusted proportionately in connection
with any change in the Company's capitalization pursuant to Section 10,
below. To the extent required by Section 162(m) of the Code or the
regulations thereunder, in applying the foregoing limitation with respect
to an Employee, if any Option or SAR is canceled, the canceled Option or
SAR shall continue to count against the maximum number of Shares with
respect to which Options and SARs may be granted to the Employee. For this
purpose, the repricing of an Option (or in the case of a SAR, the base
amount on which the stock appreciation is calculated is reduced to reflect
a reduction in the Fair Market Value of the Common Stock) shall be treated
as the cancellation of the existing Option or SAR and the grant of a new
Option or SAR.
(i) Early Exercise. The Award Agreement may, but need not, include a
provision whereby the Grantee may elect at any time while an Employee,
Director or Consultant to exercise any part or all of the Award prior to
full vesting of the Award. Any unvested Shares received pursuant to such
exercise may be subject to a repurchase right in favor of the Company or a
Related Entity or to any other restriction the Administrator determines to
be appropriate.
(j) Term of Award. The term of each Award shall be the term stated in
the Award Agreement, provided, however, that the term of an Incentive Stock
Option shall be no more than ten (10) years from the date of grant thereof.
However, in the case of an Incentive Stock Option granted to a Grantee who,
at the time the Option is granted, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or
any Parent or Subsidiary, the term of the Incentive Stock Option shall be
five (5) years from the date of grant thereof or such shorter term as may
be provided in the Award Agreement.
(k) Transferability of Awards. Incentive Stock Options may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Grantee, only by the Grantee;
provided, however, that the Grantee may designate a beneficiary of the
Grantee's Incentive Stock Option in the event of the Grantee's death on a
beneficiary designation form provided by the Administrator. Other Awards
shall be transferable to the extent provided in the Award Agreement.
(l) Time of Granting Awards. The date of grant of an Award shall for all
purposes be the date on which the Administrator makes the determination to
grant such Award, or such other date as is determined by the Administrator.
Notice of the grant determination shall be given to each Employee, Director
or Consultant to whom an Award is so granted within a reasonable time after
the date of such grant.
7. Award Exercise or Purchase Price, Consideration, Taxes and Reload
Options.
(a) Exercise or Purchase Price. The exercise or purchase price, if any,
for an Award shall be as follows:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time of the grant of such
Incentive Stock Option owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or
any Parent or Subsidiary, the per Share exercise price shall be not
less than one hundred ten percent (110%) of the Fair Market Value
per Share on the date of grant; or
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(B) granted to any Employee other than an Employee described in
the preceding paragraph, the per Share exercise price shall be not
less than one hundred percent (100%) of the Fair Market Value per
Share on the date of grant.
(ii) In the case of a Non-Qualified Stock Option, the per Share
exercise price shall be not less than eighty-five percent (85%) of the
Fair Market Value per Share on the date of grant unless otherwise
determined by the Administrator.
(iii) In the case of Awards intended to qualify as Performance-Based
Compensation, the exercise or purchase price, if any, shall be not less
than one hundred percent (100%) of the Fair Market Value per Share on
the date of grant.
(iv) In the case of other Awards, such price as is determined by the
Administrator.
(v) Notwithstanding the foregoing provisions of this Section 7(a),
in the case of an Award issued pursuant to Section 6(d), above, the
exercise or purchase price for the Award shall be determined in
accordance with the principles of Section 424(a) of the Code.
(b) Consideration. Subject to Applicable Laws, the consideration to be
paid for the Shares to be issued upon exercise or purchase of an Award
including the method of payment, shall be determined by the Administrator
(and, in the case of an Incentive Stock Option, shall be determined at the
time of grant). In addition to any other types of consideration the
Administrator may determine, the Administrator is authorized to accept as
consideration for Shares issued under the Plan the following:
(i) cash;
(ii) check;
(iii) delivery of Grantee's promissory note with such recourse,
interest, security, and redemption provisions as the Administrator
determines as appropriate;
(iv) surrender of Shares or delivery of a properly executed form of
attestation of ownership of Shares as the Administrator may require
(including withholding of Shares otherwise deliverable upon exercise of
the Award) which have a Fair Market Value on the date of surrender or
attestation equal to the aggregate exercise price of the Shares as to
which said Award shall be exercised (but only to the extent that such
exercise of the Award would not result in an accounting compensation
charge with respect to the Shares used to pay the exercise price unless
otherwise determined by the Administrator);
(v) with respect to Options, payment through a broker-dealer sale
and remittance procedure pursuant to which the Grantee (A) shall
provide written instructions to a Company designated brokerage firm to
effect the immediate sale of some or all of the purchased Shares and
remit to the Company, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate exercise price
payable for the purchased Shares and (B) shall provide written
directives to the Company to deliver the certificates for the purchased
Shares directly to such brokerage firm in order to complete the sale
transaction; or
(vi) any combination of the foregoing methods of payment.
(c) Taxes. No Shares shall be delivered under the Plan to any Grantee or
other person until such Grantee or other person has made arrangements
acceptable to the Administrator for the satisfaction of any foreign,
federal, state, or local income and employment tax withholding obligations,
including, without limitation, obligations incident to the receipt of
Shares or the disqualifying disposition of Shares received on exercise of
an Incentive Stock Option. Upon exercise of an Award, the Company shall
withhold or collect from Grantee an amount sufficient to satisfy such tax
obligations.
(d) Reload Options. In the event the exercise price or tax withholding
of an Option is satisfied by the Company or the Grantee's employer
withholding Shares otherwise deliverable to the Grantee, the Administrator
may issue the Grantee an additional Option, with terms identical to the
Award Agreement
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under which the Option was exercised, but at an exercise price as
determined by the Administrator in accordance with the Plan.
8. Exercise of Award.
(a) Procedure for Exercise; Rights as a Stockholder.
(i) Any Award granted hereunder shall be exercisable at such times
and under such conditions as determined by the Administrator under the
terms of the Plan and specified in the Award Agreement.
(ii) An Award shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the
terms of the Award by the person entitled to exercise the Award and
full payment for the Shares with respect to which the Award is
exercised. Until the issuance (as evidenced by the appropriate entry on
the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to
vote or receive dividends or any other rights as a stockholder shall
exist with respect to Shares subject to an Award, notwithstanding the
exercise of an Option or other Award. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the
Award. No adjustment will be made for a dividend or other right for
which the record date is prior to the date the stock certificate is
issued, except as provided in the Award Agreement or Section 10, below.
(b) Exercise of Award Following Termination of Continuous Service.
(i) An Award may not be exercised after the termination date of such
Award set forth in the Award Agreement and may be exercised following
the termination of a Grantee's Continuous Service only to the extent
provided in the Award Agreement.
(ii) Where the Award Agreement permits a Grantee to exercise an
Award following the termination of the Grantee's Continuous Service for
a specified period, the Award shall terminate to the extent not
exercised on the last day of the specified period or the last day of
the original term of the Award, whichever occurs first.
(iii) Any Award designated as an Incentive Stock Option to the
extent not exercised within the time permitted by law for the exercise
of Incentive Stock Options following the termination of a Grantee's
Continuous Service shall convert automatically to a Non-Qualified Stock
Option and thereafter shall be exercisable as such to the extent
exercisable by its terms for the period specified in the Award
Agreement.
(c) Buyout Provisions. The Administrator may at any time offer to buy
out for a payment in cash or Shares, an Award previously granted, based on
such terms and conditions as the Administrator shall establish and
communicate to the Grantee at the time that such offer is made.
9. Conditions Upon Issuance of Shares.
(a) Shares shall not be issued pursuant to the exercise of an Award
unless the exercise of such Award and the issuance and delivery of such
Shares pursuant thereto shall comply with all Applicable Laws, and shall be
further subject to the approval of counsel for the Company with respect to
such compliance.
(b) As a condition to the exercise of an Award, the Company may require
the person exercising such Award to represent and warrant at the time of
any such exercise that the Shares are being purchased only for investment
and without any present intention to sell or distribute such Shares if, in
the opinion of counsel for the Company, such a representation is required
by any Applicable Laws.
10. Adjustments Upon Changes in Capitalization. Subject to any required
action by the shareholders of the Company, the number of Shares covered by
each outstanding Award, and the number of Shares which have been authorized
for issuance under the Plan but as to which no Awards have yet been granted or
which have been returned to the Plan, the exercise or purchase price of each
such outstanding Award, as well as any other
A-9
<PAGE>
terms that the Administrator determines require adjustment shall be
proportionately adjusted for (i) any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Shares, (ii) any other
increase or decrease in the number of issued Shares effected without receipt
of consideration by the Company, or (iii) as the Administrator may determine
in its discretion, any other transaction with respect to Common Stock to which
Section 424(a) of the Code applies; provided, however that conversion of any
convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Administrator and its determination shall be final, binding and
conclusive. Except as the Administrator determines, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of
stock of any class, shall affect, and no adjustment by reason hereof shall be
made with respect to, the number or price of Shares subject to an Award.
11. Corporate Transactions/Changes in Control/Related Entity Dispositions.
(a) The Administrator, in its sole discretion, may provide in any Award
Agreement that, in the event of a Corporate Transaction, all or a portion
of the unvested Award covered by such Award Agreement shall automatically
become vested and exercisable and be released from any restrictions on
transfer (other than transfer restrictions applicable to Incentive Stock
Options) and repurchase or forfeiture rights immediately prior to the
specified effective date of such Corporate Transaction. Effective upon the
consummation of the Corporate Transaction, all outstanding Awards under the
Plan shall terminate. However, all such Awards shall not terminate if the
Awards are, in connection with the Corporate Transaction, assumed by the
successor corporation or Parent thereof.
(b) The Administrator, in its sole discretion, may provide in any Award
Agreement that, in the event of a Change in Control (other than a Change in
Control which also is a Corporate Transaction), all or a portion of the
unvested Award covered by such Award Agreement shall automatically become
vested and exercisable and be released from any restrictions on transfer
(other than transfer restrictions applicable to Incentive Stock Options)
and repurchase or forfeiture rights immediately prior to the specified
effective date of such Change in Control.
(c) The Administrator, in its sole discretion, may provide in any Award
Agreement that, effective upon the consummation of a Related Entity
Disposition, all or a portion of the unvested Award covered by such Award
Agreement shall automatically become vested and exercisable and be released
from any restrictions on transfer (other than transfer restrictions
applicable to Incentive Stock Options) and repurchase or forfeiture rights
immediately prior to the effective date of the Related Entity Disposition.
Effective upon the consummation of a Related Entity Disposition, for
purposes of the Plan and all Awards, the Continuous Service of each Grantee
who is at the time engaged primarily in service to the Related Entity
involved in such Related Entity Disposition shall terminate. However, such
Continuous Service shall not be deemed to terminate if such Award is, in
connection with the Related Entity Disposition, assumed by the successor
entity or its Parent.
(d) The Administrator, in its sole discretion, may provide in any Award
Agreement for other acceleration of vesting and exercisability, and release
from restrictions on transfer (other than transfer restrictions applicable
to Incentive Stock Options) and repurchase or forfeiture rights ("Other
Acceleration") of an Award covered by such Award Agreement in addition to
those set forth in subsections (a), (b) and (c) above. The terms and
conditions of such acceleration and release shall be determined in the sole
discretion of the Administrator and shall be fully set forth in the Award
Agreement.
(e) Notwithstanding the above, the Administrator may, in its discretion,
prevent the acceleration and vesting and release of restrictions on
transfer and repurchase or forfeiture rights of any outstanding Award with
respect to any Corporate Transaction, Change of Control, Related Entity
Disposition or Other Acceleration provisions.
12. Effective Date and Term of Plan. The Plan shall become effective upon
the earlier to occur of its adoption by the Board or its approval by the
stockholders of the Company. It shall continue in effect for a term
A-10
<PAGE>
of ten (10) years unless sooner terminated. Subject to Section 16, below, and
Applicable Laws, Awards may be granted under the Plan upon its becoming
effective.
13. Amendment, Suspension or Termination of the Plan.
(a) The Board may at any time amend, suspend or terminate the Plan. To
the extent necessary to comply with Applicable Laws, the Company shall
obtain stockholder approval of any Plan amendment in such a manner and to
such a degree as required.
(b) No Award may be granted during any suspension of the Plan or after
termination of the Plan.
(c) Any amendment, suspension or termination of the Plan (including
termination of the Plan under Section 12, above) shall not affect Awards
already granted, and such Awards shall remain in full force and effect as
if the Plan had not been amended, suspended or terminated, unless mutually
agreed otherwise between the Grantee and the Administrator, which agreement
must be in writing and signed by the Grantee and the Company.
14. Reservation of Shares.
(a) The Company, during the term of the Plan, will at all times reserve
and keep available such number of Shares as shall be sufficient to satisfy
the requirements of the Plan.
(b) The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares
hereunder, shall relieve the Company of any liability in respect of the
failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
15. No Effect on Terms of Employment/Consulting Relationship. The Plan shall
not confer upon any Grantee any right with respect to the Grantee's Continuous
Service, nor shall it interfere in any way with his or her right or the
Company's right to terminate the Grantee's Continuous Service at any time, with
or without cause.
16. No Effect on Retirement and Other Benefit Plans. Except as specifically
provided in a retirement or other benefit plan of the Company or a Related
Entity, Awards shall not be deemed compensation for purposes of computing
benefits or contributions under any retirement plan of the Company or a Related
Entity, and shall not affect any benefits under any other benefit plan of any
kind or any benefit plan subsequently instituted under which the availability
or amount of benefits is related to level of compensation. The Plan is not a
"Retirement-Plan" or "Welfare Plan" under the Employee Retirement Income
Security Act of 1974, as amended.
17. Stockholder Approval. The grant of Incentive Stock Options under the
Plan shall be subject to approval by the stockholders of the Company within
twelve (12) months before or after the date the Plan is adopted excluding
Incentive Stock Options issued in substitution for outstanding Incentive Stock
Options pursuant to Section 424(a) of the Code. Such stockholder approval shall
be obtained in the degree and manner required under Applicable Laws. The
Administrator may grant Incentive Stock Options under the Plan prior to
approval by the stockholders, but until such approval is obtained, no such
Incentive Stock Option shall be exercisable. In the event that stockholder
approval is not obtained within the twelve (12) month period provided above,
all Incentive Stock Options previously granted under the Plan shall be
exercisable as Non-Qualified Stock Options.
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<PAGE>
APPENDIX "A"
PROXY PROXY
uBID, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS ON MAY 24, 1999
The undersigned hereby appoints Gregory K. Jones and Thomas E. Werner
(collectively, the "Proxies"), or either of them, each with the power of
substitution, to represent and vote the shares of the undersigned, with all the
powers which the undersigned would possess if personally present, at the Annual
Meeting of Stockholders (the "Annual Meeting") of uBid, Inc., a Delaware
corporation (the "Company"), to be held on Monday, May 24, 1999, at the Westin
O'Hare Hotel, 6100 River Road, Rosemont, Illinois, and at any adjournments or
postponements thereof. SHARES REPRESENTED BY THIS PROXY CARD WILL BE VOTED AS
DIRECTED BY THE STOCKHOLDER. IF NO SUCH DIRECTIONS ARE INDICATED, THE PROXIES
WILL HAVE AUTHORITY TO VOTE FOR THE ELECTION OF THE NOMINEES LISTED BELOW AND
FOR PROPOSALS 2 AND 3. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING.
The Board of Directors recommends a vote FOR the election of the nominees
listed below and FOR Proposals 2 and 3.
SEE REVERSE SIDE: IF YOU WISH TO VOTE IN ACCORDANCE WITH
THE BOARD OF DIRECTORS' RECOMMENDATIONS, JUST SIGN AND DATE
ON THE REVERSE SIDE. YOU NEED NOT MARK ANY BOXES.
_FOLD AND DETACH HERE_
<PAGE>
<TABLE>
<CAPTION>
Please mark
your votes as [_]
indicated in
this example
FOR WITHHOLD
the nominees listed below AUTHORITY
(except as marked to the to vote for nominees
contrary below) listed below
<S> <C> <C> <C> <C> <C> <C>
1. ELECTION OF DIRECTORS For Against Abstain
INSTRUCTIONS: To withhold authority [_] [_] 2. To approve the [_] [_] [_]
to vote for any nominee, print that uBid, Inc. 1998
nominee's name in the space provided Stock Incentive Plan
below
Class I: Frank F. Khulusi For Against Abstain
3. To ratify the [_] [_] [_]
Mark C Layton appointment of Ernst &
Young LLP as independent
_______________________________________
auditors for the 1999
fiscal year
</TABLE>
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD
PROMPTLY USING THE ENCLOSED REPLY ENVELOPE.
<TABLE>
<S> <C> <C>
(Signature)____________________ (Signature, if jointly held) _________________________ DATE:___________________, 1999
</TABLE>
Please sign exactly as your name appears above. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such. If a corporation, please sign in full corporate name by
President or other authorized person. If a partnership, please sign in full
partnership name by authorized person.
_FOLD AND DETACH HERE_
2
