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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission File Number: 000-25119
uBID, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0775328
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8550 West Bryn Mawr, Suite 200, Chicago, Illinois 60631
(Address of principal executive offices, including zip code)
(773) 272-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
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Indicate whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment the
Form 10-K. [_]
As of March 22, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $293,090,599 computed with reference to the
closing price quoted on the Nasdaq National Market on such date. Although
directors, executive officers and 10% stockholders were assumed to be
"affiliates" of the Registrant for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.
As of March 22, 2000, there were 11,628,036 shares of Common Stock ($0.001 par
value) outstanding.
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uBID, INC. FORM 10-K
TABLE OF CONTENTS
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PART I Page
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Item 1 Business.................................................. 1
Item 2 Properties................................................ 25
Item 3 Legal Proceedings......................................... 26
Item 4 Submission of Matters to a Vote of Security Holders....... 26
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters............................... 26
Item 6 Selected Financial Data................................... 27
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 28
Item 7A Quantitative and Qualitative Disclosures About Market Risk 34
Item 8 Financial Statements and Supplementary Data............... 34
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................... 34
PART III
Item 10 Directors and Executive Officers of the Registrant........ 34
Item 11 Executive Compensation.................................... 37
Item 12 Security Ownership of Certain Beneficial
Owners and Management..................................... 41
Item 13 Certain Relationships and Related Transactions............ 43
PART IV
Item 14 Exhibits, Financial Statements Schedules and
Reports on Form 8-K....................................... 48
Signatures................................................................ 49
Index to Exhibits......................................................... 50
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FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Annual Report
on Form 10-K include forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, and Section 21E of the Securities Exchange
Act of 1934. uBid intends such forward-looking statements to be covered by the
safe harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and uBid is including this statement
for purposes of complying with these safe harbor provisions. uBid has based
these forward-looking statements on its current expectations and projections
about future events. These forward-looking statements are not guarantees of
future performance and are subject to risks, uncertainties and assumptions,
including those set forth under "Investment Considerations" in this Report.
Words such as "expect," "anticipate," "intend," "plan," "believe," "will,"
"estimate" and variations of such words and similar expressions are intended to
identify such forward-looking statements. uBid undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
Report might not occur.
PART I
Item 1. Business
Overview
uBid operates a leading online auction marketplace offering products to
both consumers and businesses. uBid provides a unique shopping experience by
offering buyers the opportunity to set their own prices on popular, brand name
products at significant discounts to prices found through traditional channels.
uBid's online auctions provide suppliers with an efficient and economical
channel for maximizing revenue on their merchandise while at the same time
moving excess or unique products and providing consumers and businesses with a
convenient method for obtaining this merchandise at substantial savings. uBid's
auctions currently feature a rotating selection of brand name computers,
consumer electronics, housewares, sporting goods and memorabilia, jewelry,
apparel, appliances, art, travel and events, home improvement products, and off-
lease computer equipment, which typically sell at significant discounts to
prices at traditional retailers. uBid runs auctions 24 hours a day, seven days a
week, currently offering on average over 6,700 items in each of its daily
auctions. From uBid's first auction in December 1997 through December 31, 1999,
uBid has auctioned over 1,699,000 merchandise units, registered over 1,030,000
users and recorded more than 135 million visits to its Website.
uBid obtains merchandise directly from over 430 manufacturers, distributors
and retailers. In May 1999, uBid launched the uBid Auction Community, which
provides approved suppliers access to the uBid Website to place products for
direct auction to customers. uBid has recently expanded into the business-to-
business market and plans to offer a variety of products for auction to business
customers.
uBid's business was established by Creative Computers, Inc. in April 1997
and uBid was incorporated in Delaware on September 19, 1997 as a wholly-owned
subsidiary of Creative. In December 1998, uBid completed an initial public
offering of 1,817,000 shares of its common stock. On June 7, 1999, Creative
distributed to its stockholders the remaining 80.1% of the uBid common stock
owned by Creative. uBid's executive offices are located at 8550 West Bryn Mawr,
Suite 200, Chicago, Illinois 60631 and its telephone number at such location is
(773) 272-5000.
On February 9, 2000, CMGI, Inc. agreed to acquire uBid through a merger of
Senlix Corporation, a wholly-owned subsidiary of CMGI with and into uBid, as a
result of which the stockholders of uBid will become stockholders of CMGI.
Under the terms of the Agreement and Plan of Merger and Reorganization, CMGI
will issue .2628 shares of common stock for every share of uBid common stock
held on the record date of the transaction. The
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merger is expected to close in May 2000 and is subject to customary conditions,
including approval by uBid stockholders.
Industry Background
Growth of the Internet and Online Commerce
The Internet has emerged as a medium for commerce enabling millions of
people to share information and conduct online business on a global basis.
Consumers and businesses typically use the Web to exchange products and services
that can be easily described with graphics and text such as computers, consumer
electronics, books, CDs and airline tickets. The Internet provides the
opportunity to develop one-to-one relationships with customers from a central
location without having to build the infrastructure associated with traditional
businesses. It also provides a direct channel for businesses to interactively
market and sell products to other businesses.
The Online Auction Market Opportunity
Online auctions are uniquely suited to the Internet because they leverage
the information collection abilities and interactive nature of the Internet.
Online auctions allow merchants to minimize their risk of price erosion on
unsold products. These products may include excess and unique items, which can
be new or refurbished. Suppliers traditionally have sold excess goods through
various liquidation channels such as factory outlets, catalogs, resellers and
mass merchants. These channels are highly inefficient for buyers and sellers for
the following reasons:
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. the channels are fragmented and multi-layered; . sellers are unable to gather, interpret and use
information effectively to minimize inventory and
maximize margins;
. buyers and sellers lack a reliable and interactive . buyers have limited access to a variety and breadth
mechanism for setting prices that reflect the of goods; and
product's true market value;
. sellers may incur a high cost of developing and . transactions must be completed during pre-set hours.
maintaining the physical infrastructure that must be
reflected in the price of products and services;
. sellers are otherwise unable to cost effectively
reach a broad consumer audience;
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Online auctions leverage the Internet infrastructure to solve many of these
inefficiencies by empowering buyers and suppliers. Suppliers can now maximize
revenue on merchandise through an alternative channel, while preserving their
primary distribution channel. Suppliers can test price points and demand on new
or limited supply items. Buyers can set their own price through dynamic pricing
and their specific requirements. In addition, the auction site can collect
valuable marketing and pricing information about the bidders and sellers. As a
result, a significant opportunity exists for a centralized online marketplace
that combines the unique attributes of the Internet with the economic advantages
of an auction format.
The uBid Solution
uBid's online auctions provide suppliers with an efficient and economical
channel for maximizing revenue on their merchandise while at the same time
moving excess merchandise and providing consumers and businesses with a
convenient method for obtaining these products at substantial savings.
uBid's online auctions offer:
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. Compelling Value Proposition for Customers. Customers traditionally have made
purchase decisions based on static pricing models that assume the value of a
single product is the same for each customer. uBid provides a unique buying
experience, offering consumers and businesses the opportunity to set their
own prices on popular, brand name products at significant discounts to
prices found through traditional channels. uBid believes that the compelling
value proposition of this approach can be extended to virtually all product
categories.
. Broad Product Offering. Customers are attracted to uBid's auctions by uBid's
broad selection of over 6,700 total items on average available in each
daily auction. uBid has leveraged its auction experience, traffic
information, merchandising relationships and direct customer interface
capabilities to expand uBid's product offering to include housewares,
sporting goods and memorabilia, jewelry, apparel, appliances, art, travel
and events, home improvement products and office lease equipment.
. Highly Efficient Channel for Suppliers. uBid's online auctions provide
suppliers with an attractive distribution channel for their products.
Suppliers are attracted to uBid because of the large number of potential
buyers. The frequency of uBid's auctions and uBid's ability to continuously
add new items allow suppliers to dispose of inventory quickly to minimize
the risk of price erosion. In addition, uBid's auctions provide suppliers
the opportunity to optimize sales value while at the same time liquidating
excess merchandise directly to a nationwide audience, without conflicting
with their primary distribution channels.
. Extensive Merchandising Experience. uBid has developed a comprehensive
auction management process that allows uBid to capture detailed information
concerning where, when, how and to whom products are sold, and helps uBid to
predict customer preferences. uBid's auction merchandising model allows uBid
to maximize revenues on auctioned products by using statistical software
models. These models allow uBid to project the price at which each product
will ultimately be sold to consumers based on current traffic and demand,
and to determine the price at which to purchase products from over 430
suppliers, the product mix, and the number of products uBid should auction
on a given day.
Business Strategy
uBid's objective is to become the online auction marketplace of choice for
suppliers and consumers. The key elements of uBid's strategy are:
. Increase Traffic to the uBid Site. uBid believes that a key component to its
success is increasing traffic to its Website. uBid will focus on the
following objectives to implement this strategy:
Strengthen the uBid Brand. uBid intends to strengthen its brand
through off-line advertising campaigns which may include traditional media
forms such as print, radio and television. uBid also plans to increase points
of access by forming relationships with, and advertising on, leading
Websites, such as uBid's existing arrangements with AOL, MSN, PCWorld Online,
LookSmart and Prodigy. Premier positioning on these sites drives traffic and
gives uBid credibility to users and suppliers who are unfamiliar with uBid's
business.
Increase Repeat Visits. uBid believes that its auction format, regular
rotation of merchandise and user-friendly Website encourage bidders to return
on a frequent basis. Repeat orders accounted for approximately 79% of total
customer orders for the three months ended December 31, 1999. uBid has
instituted a variety of customer loyalty programs designed to increase
customer retention. In addition, uBid believes that its Website features,
which allow customers to track their complete bidding history and quickly
update customer information, increase user loyalty.
Introduce Co-Branded Auction Sites. uBid has begun to construct
auction sites in cooperation with third parties and will provide them with
uBid's auction capabilities. These sites will be co-branded under the uBid
name and the name of the third party.
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Provide Internet Portal Auction Capabilities. uBid believes
opportunities exist to partner with various Internet portals to provide
auction capabilities for both the business and consumer markets. uBid intends
to seek arrangements in which uBid would provide the auction software and
operate the auctions for the portal. In exchange, the portal could provide
traffic to the main uBid site or pay other compensation.
. Expand Markets. uBid believes that significant opportunities exist to
leverage its auction technology, marketing and expertise into new markets.
Business-to-Business. Business-to-business markets to date have seen
very little penetration by electronic commerce, and the current distribution
in many of these markets is concentrated in various extremely inefficient
broker-dealer networks. uBid believes opportunities exist in various
business-to-business equipment and commodity product categories.
uBid Auction Community. In May 1999, uBid launched the uBid Auction
Community to allow suppliers to further benefit from the uBid infrastructure.
The Auction Community allows approved suppliers to place products directly on
the uBid Website for auction. It also provides suppliers access to the site
directly, allowing them to benefit from uBid's marketing resources, call
center operations, credit card processing and auction software. Upon sale,
uBid processes the credit card transaction and receives a commission from the
sale, and the supplier ships the products directly to the customer. In
December 1999, the Auction Community had over 900 approved suppliers, with an
average of over 10,000 units being offered at auction each week. uBid
believes that the Auction Community will increase the number of products
offered on its Website and will expand the number of suppliers offering
products for auction.
International Opportunities. uBid intends to expand the uBid model
into international markets. Prior to uBid's June 1999 spin-off from Creative
Computers, uBid was contractually restricted from selling its products
overseas. Since then, uBid has entered into an agreement with Liberty One, an
Australian media company, to provide Liberty One access to uBid's auction
technology and brand in exchange for a licensing fee and payments for future
royalties from its auction sales in certain East Asian countries, certain
Southeast Asian countries, as well as Australia and New Zealand. uBid plans
to enter other markets, such as Europe, either directly or through alliances.
. Broaden Category Offerings. uBid is continuing to expand its lines of
merchandise to add categories that are well suited for the online auction
format. While uBid's initial focus was primarily on computer products and
consumer electronics, uBid has broadened its product categories to include
apparel, appliances, art, travel and events, home improvement products and
office lease equipment. In addition, uBid has expanded its computer products
category to include downloadable software through its agreement with Digital
River.
. Increase Revenue Sharing and Commission Based Arrangements with Suppliers.
uBid believes revenue sharing arrangements increase margin opportunity for
suppliers and ensures uBid's gross margin percentage. uBid has entered into
a number of revenue sharing arrangements to split the sales proceeds with
suppliers on an agreed-upon percentage basis in which title to the
merchandise passes to uBid only after the sale. In the fourth quarter of
1999, uBid generated approximately 12% of its revenue from revenue sharing
agreements and expects to increase this percentage over time. In addition,
uBid plans on expanding into product categories and markets in which uBid
will act as an auction agent and record only a commission on the product
sold.
The uBid Auction
uBid has designed its attractive, fast, and easy-to-use Website to provide
a compelling shopping experience for the user through an interactive auction
format. Customers enter the auction at the uBid home page, or through a link to
the home page, which displays a list of product categories and sub-categories
and showcases the auction's featured items. Within a specific sub-category, uBid
auctions a number of identical items at the same time. The minimum opening bid
for each item starts as low as $7. The product page for each item features a
concise product description, full-color image and detailed technical
specifications. In addition, a table lists the quantity available, the
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bid range, the minimum incremental bid, the current winning bidders, the amount
of their bids and the time of auction close.
To participate in the auction, a first-time bidder must complete the simple
electronic registration form found on uBid's Website. The bidder is then given
an identification number and chooses a password. Once registered, the customer
can bid and buy at will in the same or future auctions. After a customer bids on
a product, the corresponding bidder list is updated to reflect the bid and the
customer's new position in the list of bidders. At the customers' option, they
may elect to receive an e-mail when outbid or use agent bidding to automatically
increase the bid up to a predetermined maximum dollar amount. These functions
increase the likelihood that the user will place an additional bid.
When the auction closes, the highest bidders win at their actual bid
prices. Each winning bidder might pay a price that is different from the prices
paid by other winning bidders. When bidders' prices are equal, bids for larger
quantities and with earlier initial bid times prevail. Using its proprietary
software, uBid automatically determines the winning bidders and sends an e-mail
message to confirm their purchases the same day. After being screened by uBid's
anti-fraud software, the customer's credit card is charged and the merchandise
is shipped.
Products and Merchandising
uBid currently offers on average over 6,700 total items in each of its
daily auctions. For the quarter ended December 31, 1999, uBid's product mix
based on revenues consisted of approximately 58% new merchandise and 42%
refurbished products. This mix can fluctuate from quarter to quarter depending
on the type of products available for purchase at acceptable prices. Regardless
of the source of the merchandise, most merchandise uBid sells is covered by
manufacturer or refurbished warranties. For most products, the customer may
purchase an extended warranty provided by a third party, Independent Dealer
Services, a division of Aon, Inc. in those states where third-party warranties
are permitted by law. uBid believes that this extended warranty, combined with
uBid's emphasis on customer service, is an advantage over its competitors, which
generally rely solely on the warranties provided by the supplier.
uBid currently offers merchandise in the following categories:
Computer Products: Desktops, portable computers, computer accessories,
disk drives, modems, monitors/video equipment, components, printers,
scanners, digital cameras, software and home office products.
Consumer Electronics: Home theater equipment, home audio equipment,
speakers, televisions, camcorders, VCRs, DVD players, portable audio
players, security systems, cellular phones and automobile audio equipment.
Sporting Goods and Memorabilia: Sports memorabilia, golf and tennis,
health and fitness, outdoor sports, bicycles, water sports and team sports
equipment.
Jewelry and Gifts: Fine jewelry, including rings, earrings, watches,
bracelets and loose stones.
Home Improvement: Power tools, lawn and garden, outdoor and patio,
electrical, and plumbing products.
Appliances: Kitchen and cleaning appliances.
Clothing and Apparel: Menswear, Womenswear and Kidswear.
Home & Leisure: Cleaning products, furniture, home comfort products,
kitchen products, music, and personal care products.
Travel and Events: Business and corporate travel, cruises, events lodging,
transportation, luggage, and travel accessories.
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Art: Prints, antiques, artifacts, and other art media.
Supplier Relationships
uBid obtains merchandise from over 430 manufacturers, distributors and
retailers. uBid believes that it has substantial access to additional sources of
merchandise and is in a position to leverage its existing relationships and add
new suppliers to increase the breadth and number of products it offers. Since
merchandise availability can be unpredictable, a strong base of supplier
relationships is important to uBid's success. As a result, uBid's buying staff
maintains ongoing contact with suppliers to learn when new merchandise becomes
available.
uBid assumes the full inventory and price risk on most of its products.
uBid believes its ability to sell its inventory quickly through auctions
justifies the cost of and risk involved in carrying inventory. uBid has
developed a sophisticated auction management process to project the price at
which each product will ultimately be sold to consumers based on current traffic
and demand, and to determine at which price to purchase products from suppliers.
If left with excess inventory, uBid places this inventory up for auction
immediately through its auction site. To date, uBid's exposure to excess
inventory has not been material.
uBid also has entered into revenue sharing arrangements with several
suppliers to split the sales proceeds on an agreed-upon percentage basis. uBid
believes these revenue sharing arrangements are attractive to suppliers because
they allow the supplier to potentially realize more revenue than in the case
where uBid purchases the merchandise for a fixed price. uBid's avoidance of any
inventory carrying risk, the greater margin upside for the suppliers and ensured
gross margin percentage for uBid make revenue sharing agreements attractive to
both uBid and its suppliers. These agreements represented approximately 12% of
uBid's revenue for the quarter ended December 31, 1999. As uBid enters into more
of these arrangements, uBid believes that the percentage of its revenues
represented by revenue sharing arrangements will continue to increase over the
next 12 months.
Sales and Marketing
To achieve uBid's objective of becoming the Internet auction site of choice
for suppliers and consumers, uBid has developed a marketing strategy to
strengthen its brand name and increase customer traffic to its Website. This
marketing strategy consists of establishing relationships with leading online
companies, as well as employing a mix of media and promotional activities to
achieve these goals.
Relationships with Leading Online Companies. uBid has established
relationships with a number of Internet service and content providers to
increase its access to online customers and to build brand recognition. uBid
intends to complement uBid's existing relationships and establish a leading
brand name by pursuing additional agreements.
Internet Advertising. uBid has taken a disciplined and selective approach
in its advertising strategy that primarily considers the costs of customer
acquisition. uBid attempts to maximize its return from promotional expenditures
by selecting advertising media based on the cost relative to the likely audience
and ability to generate increased traffic for its Website. uBid places
advertising on various high-profile and high-traffic conduit Websites including
AOL, Excite, ESPN, PCWorld, Hotmail and Broadcast.com, as well as Websites that
are targeted at a more focused audience. These advertisements usually take the
form of banner ads that encourage readers to click through directly to uBid's
Website.
Customer Electronic Mail Messaging. uBid actively markets to its own base
of customers through a variety of marketing techniques, including email
messaging. All bidders in uBid's auctions are automatically added to uBid's
electronic mailing list, which numbered over 1,030,000 registrants through
December 31, 1999. uBid currently sends over 5 million e-mail messages each
month announcing new items available at each auction, special products
available, site changes and new features. uBid has a strict policy of sending
only solicited e-mail, and a customer can remove his or her name from its
mailing list at any time.
Order Fulfillment
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uBid obtains products from its supplier network shortly before the products
are put into auction. Although most products are held in inventory at uBid's
distribution facility, certain suppliers drop-ship products directly to
customers. However, drop-ship suppliers are generally required to use uBid
labeling and packaging standards and transmit shipment information to uBid to
provide a uniform customer experience.
The product fulfillment process, from receipt of products through shipment,
is largely automated, enabling uBid to capture real-time data on inventory
receiving, shipping and stock levels. Over 90% of the products shipped from
uBid's warehouse are shipped the next business day after an auction closes, and
uBid's tight shipping controls have historically kept shipping errors at
negligible levels. uBid believes that the speed and accuracy of its order
fulfillment process reinforces and enhances the customers' total purchase
experience.
Customer Support and Service
uBid believes that its ability to establish and maintain long-term
relationships with customers and encourage repeat visits and purchases is
dependent, in part, on the strength of uBid's customer support and service
operations and staff. uBid has established multiple channels for communicating
with its customers before and after the sale, including phone, e-mail and online
support. uBid currently employs a staff of customer support and service
personnel who are responsible for handling customer inquiries, tracking
shipments and investigating problems with merchandise. Although uBid sells
merchandise on an "as is" basis, most products are covered by manufacturers'
warranties or third party warranties purchased by the customer. Although uBid
may not be obligated to do so, uBid may in specific instances accept merchandise
returns if a product is defective or does not conform to the specifications of
the item sold at auction, and uBid works with its customers to resolve
complaints about merchandise. In addition, uBid has automated some of its
customer service functions, including providing users of the Website with online
access to information such as product shipping status. uBid is committed to
continue enhancing its customer support and service operations through a variety
of measures including improved customer reporting systems.
Technology
uBid has implemented a broad array of customer support, transaction-
processing and fulfillment systems using a combination of both proprietary and
commercially available, licensed technologies. These systems are designed to
make both the customer experience and the transaction reporting and tracking
process as seamless and simple as possible. uBid's hardware and software systems
are designed to integrate seamlessly and manage real-time transactions with
limited human intervention. uBid's current strategy is to license commercially
available technology wherever possible rather than seek internally-developed
solutions and to focus uBid's internal software development efforts on creating
and enhancing the specialized, proprietary software that is unique to its
business.
Auction Processing and Auction Management Applications. uBid uses a set of
automated software applications for receiving and validating bids, registering
bidders, placing customers on uBid's mailing list, listing currently active and
recent winning and losing bids and reviewing and submitting customer service
requests. uBid's internally developed proprietary auction management software
continually tracks every bid posted on all auctions and utilizes regression
analysis to assist in determining the number of products to auction at any given
time. uBid believes that this system enables it to maximize margins in each
product category.
Order Processing Applications. uBid uses a set of applications for
processing successful bids as they are converted into customer orders. These
applications charge customer credit cards, print order information, transmit
order information electronically to uBid's contract warehouse and suppliers, and
deposit transaction information into uBid's accounting system. All credit card
numbers and financial and credit information are secured using the Internet
security protocol Secure Socket Layer, Version 3, an encryption standard, and
credit card numbers are maintained behind appropriate fire walls.
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Marketing Applications. uBid has developed a set of applications for
sending automated e-mail messaging to customers on a frequent basis. This
software extracts e-mail addresses from uBid's mailing list, sends e-mails to
the designated recipients and automatically services requests from customers to
remove them from the mailing list.
Systems Operations
The continued uninterrupted operation of uBid's Website is critical to its
business, and uBid strives to maximize uptime of its Website. uBid uses the
services of Exodus and other Internet service providers to provide connectivity
to the Internet with redundant carriers. Qwest Communications provides frame
relay services for uBid's back office operations. uBid believes that these
telecommunication and Internet service facilities are essential to uBid's
operations. Most of uBid's back office operations are provided through uBid's
Internet/Telecommunications Agreement with Creative.
To date, uBid has had various interruptions to its service as a result of
loss of power and telecommunications connections. uBid's insurance coverage may
not be adequate to compensate for all losses that may occur as a result of any
future service interruptions. Although uBid has implemented network security
measures and firewall security, its servers are also vulnerable to computer
viruses, physical or electronic break-ins, attempts by third parties to overload
uBid's systems and similar disruptive problems. Any of these things could lead
to interruptions, delays, loss of data or cessation in service to uBid's users.
uBid's hardware and software systems run in parallel on multiple servers,
which allows the system to balance the workload among the servers. The system
also includes redundant hardware on mission critical components, which uBid
believes would enable it to survive a potential failure of any single server
with minimal downtime. In addition, capacity can be quickly and easily expanded
by adding additional servers without incurring significant development costs. In
particular, uBid strives to maintain access to its Website and speed of use
during the most heavily trafficked times of day, which are the evening hours
around the time scheduled for auction close. In order to do this, uBid
anticipates expanding its system as usage increases to avoid any decrease in
system response time. In August 1999, uBid completed the transition to locate
its primary Website servers at Exodus communications in the Chicago area and
plans to develop a fully redundant back-up site by the end of the second quarter
of 2000. Most of uBid's back office operations are provided through agreements
with Creative. Although uBid anticipates continuing to use its current back
office administrative systems in Torrance for the near term, uBid intends to
purchase and intends to implement its own hardware and software systems, by the
end of the second quarter of 2000, at an estimated cost of approximately $1.0
million. In addition, uBid plans to install new database management software,
purchase new enterprise software and upgrade its existing systems over the next
12 months at a total estimated cost of approximately $3.3 million. uBid expects
to fund the purchase of this equipment with working capital.
The transition to, or upgrading of, uBid's hardware and software systems
and the relocation of its servers could result in delays, failures or execution
difficulties that could impair uBid's ability to receive and process orders and
ship products in a timely manner. Any disruption or interruption of uBid's
business or operations caused by such delays or failures could have a material
adverse effect on its business.
Competition
The electronic commerce market is rapidly evolving and intensely
competitive, and uBid expects competition to intensify in the future. uBid
competes with a variety of other companies depending on the type of merchandise
and sales format offered to customers. These competitors include:
<TABLE>
<S> <C>
. various Internet auction houses such as personal . personal computer manufacturers that have their own
Amazon.com Auctions, eBay, Egghead/Onsale, Yahoo! direct distribution channels for their excess inventory
Auctions, First Auction, Surplus Auction, Bid.com, or refurbished products; and
Mercata, TradeOut.com, WebAuction and Insight Auction;
</TABLE>
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<TABLE>
<S> <C>
. a number of indirect competitors that specialize in . companies with substantial customer bases in the
electronic commerce or derive a substantial portion computer and peripherals catalog business, including CDW
of their revenue from electronic commerce, including Computer Centers, PC Connection and Creative Computers,
Internet Shopping Network, AOL, Cendant, BUY.COM and some of which already sell online or may devote more
Shopping.com; resources to Internet commerce in the future.
. a variety of other companies that offer merchandise
similar to uBid's through physical auctions, with
which uBid competes for sources of supply;
</TABLE>
Ubid believes that the principal competitive factors affecting its market
are a company's ability to:
<TABLE>
<S> <C>
. attract customers at favorable customer acquisition . provide effective customer service; and
costs;
. operate a Website in an uninterrupted manner and . obtain merchandise at satisfactory prices.
with acceptable speed;
</TABLE>
uBid cannot assure you that it can maintain its competitive position
against its current and potential competitors, especially those with greater
financial, marketing, customer support, technical and other resources than uBid
has.
Some of uBid's current and potential competitors have established or may
establish cooperative relationships among themselves or directly with suppliers
to obtain exclusive or semi-exclusive sources of merchandise. In addition, there
has been consolidation in uBid's industry, which may continue in the future.
Accordingly, it is possible that new competitors or alliances among competitors
and suppliers may emerge and rapidly acquire market share. In addition,
manufacturers may elect to liquidate their products directly. Increased
competition is likely to reduce uBid's operating margins, cause uBid to lose
market share or diminish uBid's brand. If any of these things occur, uBid's
business would be significantly harmed.
Many of uBid's current and potential competitors have significantly greater
financial, marketing, customer support, technical and other resources than uBid
does. As a result, these competitors may be able to secure merchandise from
suppliers on more favorable terms than uBid can. They may be able to respond
more quickly to changes in customer preferences or devote greater resources to
developing and promoting their merchandise.
Intellectual Property and Other Proprietary Rights
uBid's performance and ability to compete are dependent to a significant
degree on its proprietary technology. uBid relies on a combination of trademark,
copyright and trade secret laws, confidentiality agreements and non-compete
agreements executed by each manager and technical measures to establish and
protect uBid's proprietary rights. The uBid service mark is registered in the
United States. uBid cannot assure you that it will be able to secure significant
protection for its service marks or trademarks. It is possible that uBid's
competitors or others will adopt product or service names similar to uBid or
other service marks or trademarks similar to uBid, thereby impeding uBid's
ability to build brand identity and possibly leading to customer confusion.
uBid's inability to protect the name "uBid" adequately could have a material
adverse effect on uBid's business, results of operations and financial
condition.
uBid's proprietary software is protected by copyright laws. The source code
for uBid's proprietary software also is protected under applicable trade secret
laws.
As part of its confidentiality procedures, uBid generally enters into
agreements with its employees and consultants and limits access to and
distribution of its software, documentation and other proprietary information.
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uBid cannot assure you that the steps it has taken will prevent misappropriation
of its technology or that agreements entered into for that purpose will be
enforceable. Notwithstanding the precautions uBid has taken, it may be possible
for a third party to copy or otherwise obtain and use uBid's software or other
proprietary information without authorization or to develop similar software
independently. Policing unauthorized use of uBid's technology is difficult,
particularly because the global nature of the Internet makes it difficult to
control the ultimate destination or security of software or other data
transmitted. The laws of other countries may afford uBid little or no effective
protection of its intellectual property.
uBid may in the future receive notices from third parties claiming
infringement by uBid's software or other aspects of uBid's business. While uBid
is not currently subject to any such claim that would have a material effect on
uBid's business or financial condition, any future claim, with or without merit,
could result in significant litigation costs and diversion of resources
including the attention of uBid's management, and require uBid to enter into
royalty and licensing agreements, which could have a material adverse effect on
its business, results of operations and financial condition. Royalty and
licensing agreements, if required, may not be available on terms acceptable to
uBid, or at all. In the future, uBid may also need to file lawsuits to enforce
its intellectual property rights, to protect its trade secrets or to determine
the validity and scope of the proprietary rights of others. Litigation, whether
successful or unsuccessful, could result in substantial costs and diversion of
resources, which could have a material adverse effect on uBid's business,
results of operations and financial condition.
uBid also relies on a variety of technologies that it licenses from third
parties, including database and Internet server software, which is used on its
Website to perform key functions. uBid cannot be certain that these third-party
technology licenses will continue to be available on commercially reasonable
terms. uBid's inability to maintain or obtain upgrades to any of these
technology licenses could result in delays in completing uBid's proprietary
software enhancements and new developments until equivalent technology could be
identified, licensed or developed and integrated. Any delays would materially
adversely affect uBid's business, results of operations and financial condition.
Employees
As of December 31, 1999 uBid had 281 employees and 61 full-time equivalent
contract personnel. None of uBid's employees is represented by a labor union,
and uBid considers its employee relations to be good. Competition for qualified
personnel in uBid's industry is intense, particularly for software development
and other technical staff. uBid believes that its future success will depend in
part on its continued ability to attract, hire and retain qualified personnel.
INVESTMENT CONSIDERATIONS
You should carefully consider the risks described below before making a
decision to invest in uBid's common stock. If any of the following risks
actually occur, uBid's business, prospects, financial condition and results of
operations could be materially adversely affected. This could cause the trading
price of uBid's stock to decline, and you may lose all or part of your
investment.
This prospectus contains forward-looking statements that involve risks and
uncertainties, including statements about uBid's future plans, objectives,
intentions and expectations. Many factors, including those described below,
could cause actual results to differ materially from those discussed in any
forward-looking statements.
uBid has a limited operating history and may experience risks encountered by
early-stage companies.
uBid began conducting auctions on the Internet in December 1997.
Accordingly, uBid has a very limited operating history for you to use in
evaluating its business. uBid's business and prospects must be considered in
light of the risks, expenses and difficulties that companies encounter in the
early stages of development, particularly companies in new and rapidly evolving
markets like the Internet. These risks include uBid's ability to do the
following:
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<PAGE>
<TABLE>
<S> <C>
. manage its growth effectively; . offer products for auction that will meet consumer
demand;
. anticipate and adapt to the rapid changes that
characterize the on-line auction market; . expand its supplier network;
. maintain and increase levels of traffic to uBid's . respond to competitive, of developments in its
Website; market; and
. continue to develop and upgrade its technology and . continue to identify, attract, retain and motivate
customer personnel service; qualified personnel.
</TABLE>
uBid is subject to restrictions on its ability to issue equity securities, which
may limit its ability to grow its business and compete effectively.
In June 1999, Creative Computers completed a distribution of uBid's common
stock to Creative Computers' stockholders, which was intended to be a tax-free
spin-off under Section 355 of the Internal Revenue Code. Section 355(e)
generally provides that a company that distributes shares of a subsidiary in a
spin-off that is otherwise tax-free will incur U.S. federal income tax liability
if 50% or more, by vote or value, of the capital stock of either the parent or
the subsidiary is subsequently acquired by one or more persons acting pursuant
to a plan or series of related transactions that include the spin-off. To ensure
that any future sale by uBid of equity securities would not disqualify the spin-
off from its tax-free status for federal income tax purposes, uBid agreed to
various restrictions on its ability to issue or repurchase its equity securities
until three years after the spin-off that are more limiting than the 50%
restriction imposed under Section 355(e). In particular, uBid agreed not to take
the following actions without Creative Computers' consent or without obtaining a
favorable IRS letter ruling that such actions would not affect the tax-free
status of the spin-off:
. until June 8, 2001, issue uBid common stock or other equity securities that
would decrease the number of shares of common stock distributed by Creative
Computers in the spin-off to less than 60% of uBid's then outstanding
common stock;
. from June 8, 2001 until June 8, 2002, issue additional shares of uBid
common stock or other equity securities that decrease the number of shares
of its common stock distributed by Creative Computers in the spin-off to
less than 55% of uBid's then outstanding common stock; and,
. until June 8, 2002, approve or permit any business combination, tender
offer or other transaction resulting in the acquisition of more than 50% of
uBid's common stock.
Creative Computers has consented to uBid's merger with CMGI as required by
uBid's agreements with Creative Computers. While uBid does not believe the
merger should cause the spin-off to be taxable to Creative Computers, the
absence of final IRS regulations under Section 355(e) has created some
uncertainty as to the application of these regulations to uBid's actions after
the spin-off, including agreeing to the merger. As a result, uBid requested and
has received an opinion from uBid's outside tax advisors, Pricewaterhouse
Coopers LLP, that the merger should not result in an adverse application of
Section 355(e) with respect to the spin-off. If the merger does not occur, uBid
is limited in its ability to issue additional equity securities and to raise
capital, acquire other companies or retain or recruit key employees. These same
restrictions apply to any proposed repurchases of uBid's common stock, but would
not preclude uBid from issuing debt securities that are not convertible into
common stock or other equity securities.
uBid has agreed to indemnify Creative Computers for any tax liability
incurred by Creative Computers arising out of actions by uBid after the spin-
off, including transactions similar to the merger, that would disqualify the
spin-off as a tax-free distribution or make the spin-off taxable to Creative
Computers for federal income tax purposes. If the spin-off were taxable due to
uBid's actions, for example, as a result of the merger, uBid would face an
indemnity obligation to Creative Computers of approximately $100 million. This
indemnity obligation would
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<PAGE>
have a significant material adverse effect on uBid's business and financial
condition and would exceed all of uBid's available capital resources. The
existence of this contingent indemnity obligation, particularly because it may
be affected by any material corporate transaction involving uBid, may make uBid
a less attractive acquisition or merger candidate until the uncertainties of
Section 355 are resolved or the restrictions described above expire.
uBid also has agreed to indemnify Creative Computers from all liabilities
relating to:
. uBid's failure, or the failure of any other person to pay, perform or
otherwise promptly discharge any of uBid's liabilities or obligations;
. any breach by uBid of any of the agreements entered into with Creative
Computers relating to the spin-off; and
. any misstatements of material fact contained in the prospectus used in
connection with uBid's initial public offering.
If uBid is required to indemnify Creative Computers based on any of these
claims, uBid may have to make substantial payments, which could adversely impact
its business and financial condition.
uBid anticipates continued losses and uBid may never become profitable.
uBid has invested heavily in its technology, Website development,
advertising, hiring of personnel and startup costs. As a result, uBid has
incurred significant net losses since its inception and uBid expects to continue
to incur losses for the foreseeable future. uBid had an accumulated deficit of
approximately $36.0 million at December 31, 1999. uBid intends to expend
significant financial and management resources on:
<TABLE>
<S> <C>
. developing uBid's brand; . building and maintaining strategic relationships; and
. marketing and advertising uBid's business; . developing and improving uBid's technology and
operating infrastructure.
. developing uBid's Website;
</TABLE>
uBid also expects to incur additional losses as a result of its significant
increase in marketing and promotional expenses. Because it historically has
operated at a loss, uBid's ability to achieve profitability given its planned
investment levels depends upon its ability to generate and sustain substantially
increased levels of net revenue. In addition, uBid plans to continue to increase
its operating expenses significantly to:
<TABLE>
<S> <C>
. increase its customer base; . purchase larger volumes of merchandise to be sold at
auction;
. increase the size of its staff,
. expand its marketing efforts to enhance its brand . increase its software development efforts; and
image;
. support its growing infrastructure
. increase its visibility on other companies'
high-traffic Websites;
</TABLE>
uBid must generate significantly increased revenues to achieve
profitability, particularly if uBid is unable to adjust expenses and increase
profit margins. In particular, computer products have been vulnerable to
decreased margins as a result of competitive pressures. uBid derived 71% of its
revenues from the sale of computers and related products in 1999. uBid cannot
assure you that it will ever achieve or sustain profitability.
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<PAGE>
uBid has made and expects to continue to make significant investments in
infrastructure and personnel in advance of levels of revenue necessary to offset
these expenditures. As a result, these expenditures are based on uBid's
operating plans and estimates of future revenues. uBid's sales and operating
results generally depend, among other things, on the volume and timing of orders
it receives, which are difficult to forecast. uBid may be unable to adjust its
spending to compensate for any unexpected revenue shortfall.
uBid requires substantial working capital to fund its business. uBid's
working capital requirements and cash flow from operating activities vary from
quarter to quarter, depending on revenues, operating expenses, capital
expenditures and other factors. uBid has experienced negative cash flow from
operations and expects this to continue for the foreseeable future. uBid
believes that its current working capital, together with its existing capital
resources, will be sufficient to meet its capital requirements through at least
the next 12 months. If uBid's capital requirements vary materially from those
currently planned, uBid may require additional financing sooner than
anticipated. If uBid is unable to obtain financing in the amounts desired and on
acceptable terms, or at all, uBid may be required to reduce significantly the
scope of its presently anticipated advertising and other expenditures, which
could harm its growth prospects and adversely affect the price of its stock.
Beginning in October 1997, uBid granted stock options that were exercisable
only in the event of a successful initial public offering of uBid's stock or
sale of the company. uBid expects to record a non-cash compensation charge of
$13.3 million over the five-year vesting period of the options. uBid recorded
$5.3 million of this charge in the fourth quarter of 1998 and $3.5 million for
the year ended December 31, 1999.
Revenue growth in prior periods may not be indicative of uBid's future growth.
uBid has achieved significant revenue growth since its inception in 1997.
However, uBid's limited operating history makes it difficult to predict future
growth. In addition, uBid's operating results may fluctuate significantly in the
future, which prevents the meaningful use of period-to-period comparisons of its
financial results. Accordingly, you should not rely on past revenue growth rates
as a prediction of uBid's future growth, if any.
uBid's financial results fluctuate and may be difficult to forecast.
uBid's quarterly revenues, expenses and operating results are
unpredictable. uBid expects that its operating results will continue to
fluctuate in the future due to a number of factors, some of which are beyond
uBid's control.
These factors include:
13
<PAGE>
<TABLE>
<S> <C>
. uBid's ability to increase its customer base; . the amount and timing of costs relating to expansion
of uBid's operations, including sales and marketing
. uBid's ability to sell products at auction at the expenditures;
price targets it sets;
. uBid's ability to introduce new types of merchandise,
. uBid's ability to control its gross margins; service offerings or customer services in a competitive
environment;
. uBid's ability to sell its inventory in a timely
manner and maintain customer satisfaction;
. technical difficulties consumers might encounter in
. the availability and pricing of merchandise from using uBid's Website;
suppliers;
. delays in shipments as a result of computer systems
. product obsolescence and price erosion; failures, strikes or other problems with uBid's delivery
service or credit card processing providers;
. consumer confidence in encrypted transactions on
the Internet; . the amount of returns of uBid's merchandise; and
. uBid's ability to obtain cost effective advertising . general economic conditions and economic conditions
on other entities' Websites; specific to the Internet and electronic commerce.
. the effectiveness of off-line advertising in
generating additional traffic to uBid's Website;
</TABLE>
To respond to competitive pressures in its market, uBid may from time to
time make service, marketing or supply decisions or acquisitions that could
adversely affect its quarterly operating results. Like other retailers, uBid may
experience seasonality in its business. Due to all of these factors, uBid's
operating results may fall below the expectations of securities analysts and
investors. This could cause a decline in the trading price of uBid's stock.
uBid may not be successful in developing brand awareness, and the failure to do
so could significantly harm its business and financial condition.
uBid believes that the importance of brand recognition will increase as
more companies engage in commerce over the Internet. Development and awareness
of the uBid brand will depend largely on uBid's ability to increase its customer
base. If suppliers do not perceive uBid as an effective marketing and sales
channel for their merchandise, or if consumers do not perceive uBid as offering
an entertaining and desirable way to purchase merchandise, uBid will be
unsuccessful in promoting and maintaining its brand. In order to attract and
retain customers and promote its brand, uBid expects to increase its marketing
and advertising budgets. If uBid is unable to successfully promote its brand or
achieve a leading position in Internet commerce, uBid's business could be
significantly harmed.
uBid's business model is unproven and evolving.
uBid is continuing to expand the breadth and depth of products and services
offered on its Website. In addition, in 1999 uBid entered into agreements to
expand its auction model to include the business-to-business market. uBid has
expanded its business model and the use of its Website as an advertising medium
for services and products of other companies and for promoting new or
complementary products and sales formats. uBid continues to offer credit to some
of its business customers that have been pre-qualified as having appropriate
credit ratings. As its business model evolves, uBid risks diluting its brand,
confusing customers and decreasing interest from suppliers. In addition, uBid
could be exposed to additional or new risks associated with these new
opportunities. If uBid is unable to address these risks, uBid's business will be
harmed.
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<PAGE>
uBid's failure to remain competitive may significantly hinder its growth.
The electronic commerce market is rapidly evolving and intensely
competitive, and uBid expects competition to intensify in the future. uBid
competes with a variety of other companies based on the type of merchandise and
the sales format they offer to customers. These competitors include:
<TABLE>
<S> <C>
. various Internet auction houses such as Amazon.com . companies that offer merchandise similar to uBid's
Auctions, eBay, Egghead/Onsale, Yahoo! Auctions, through physical auctions, with which uBid competes for
First Auction, Surplus Auction, Bid.com, Mercata, sources of supply;
TradeOut.com, WebAuction and Insight Auction;
. personal computer manufacturers with direct
distribution channels that for their excess inventory or
. a number of indirect competitors that specialize in refurbished products; and
electronic commerce or derive a substantial portion
of their revenue from electronic commerce, including . companies with substantial customer bases in the
Internet Shopping Network, AOL, Cendant, BUY.COM and computer and peripherals catalog business, including CDW
Shopping.com; Computer Centers, PC Connection and Creative Computers,
some of which already sell online or may devote more
resources to Internet commerce in the future.
</TABLE>
Some of uBid's current and potential competitors have established or may
establish cooperative relationships among themselves or directly with suppliers
to obtain exclusive or semi-exclusive sources of merchandise. In addition, there
has been consolidation in uBid's industry, which may continue in the future.
Accordingly, it is possible that new competitors or alliances among competitors
and suppliers may emerge and rapidly acquire market share. In addition,
manufacturers may elect to sell their products directly. Increased competition
is likely to reduce uBid's operating margins, cause uBid to lose market share or
diminish uBid's brand. If any of these things occur, uBid's business would be
significantly harmed.
Many of uBid's current and potential competitors have significantly greater
financial, marketing, customer support, technical and other resources than uBid
has. As a result, these competitors may be able to secure merchandise from
suppliers on more favorable terms than uBid. They may be able to respond more
quickly to changes in customer preferences or devote greater resources to
developing and promoting their merchandise.
uBid's former parent company, Creative Computers, agreed not to engage in
the online Internet auction business in the same format in which uBid conducts
its business until March 2000. Consequently, Creative Computers is now
permitted to compete directly or indirectly with uBid, including by way of
acquiring other companies or businesses. Competition from Creative Computers
could adversely affect uBid's business and financial condition.
uBid relies on its relationships with other online companies to drive traffic to
its Website and promote its brand.
uBid depends to some extent on relationships with other online companies
and expects that its dependence on these relationships will increase in the
future. These relationships include:
<TABLE>
<S> <C>
. portal arrangements and agreements for anchor . sponsorships; and
tenancy on other companies' Websites;
. banner advertisements.
. promotional placements;
</TABLE>
Generally, these arrangements have terms for up to three years, are not
exclusive, do not provide for guaranteed renewal and may be terminated by uBid
without cause. The risks created by uBid's dependence on these relationships
include:
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<TABLE>
<S> <C>
. competitors may purchase exclusive rights to . uBid's online partners might be unable to deliver a
attractive space on one or more key sites; sufficient number of customer visits or impressions; and
. significant spending on these relationships may not . uBid's online partners could compete with uBid for
increase uBid's revenues in the time periods uBid limited online auction revenues.
expects or at all;
. space on Websites may increase in price or cease to
be available to uBid on reasonable terms or at all;
</TABLE>
If any of uBid's arrangements with other online companies is terminated, or
if uBid fails to continue to acquire similar arrangements in the future, its
business could be materially harmed.
uBid's growth and future success depend on its ability to generate traffic to
its Website.
uBid's ability to sell products through its Internet auctions depends
substantially on its ability to attract user traffic to its Website. uBid has
traditionally spent significant amounts of money for online advertising to
attract users to and retain users on its Website. uBid expects its sales and
marketing expenses, including advertising expenditures, to increase
significantly as it attempts to generate increased traffic to its Website. If
uBid is unable to generate traffic to its Website cost effectively, or if uBid's
efforts to promote its auctions using both online and off-line media are not
successful, uBid's growth and business prospects will be substantially limited.
uBid's purchased inventory model subjects it to risks of decreased or negative
gross margins.
uBid currently purchases most of the merchandise to be sold at auction, and
in doing so assumes the inventory and price risks of these products. These risks
are especially significant because much of the merchandise uBid auctions is
subject to rapid technological change, obsolescence and price erosion. Since
uBid relies heavily on purchased inventory, uBid's success will depend on its
ability to sell its inventory rapidly through its auctions. uBid also relies
heavily on the ability of uBid's buying staff to purchase inventory at
attractive prices relative to resale value and uBid's ability to manage customer
returns and the shrinkage resulting from theft, loss and misrecording of
inventory.
Due to the inherently unpredictable nature of auctions, it is impossible
for uBid to determine with certainty whether any item will sell for more than
the price uBid pays for it. Further, because minimum opening bid prices for the
merchandise listed on uBid's Website generally are lower than the acquisition
costs for the merchandise, uBid cannot be certain that uBid will achieve
positive gross margins on any given sale. If uBid is unable to liquidate its
purchased inventory rapidly, if uBid's buying staff fails to purchase inventory
at attractive prices relative to resale value at auction, or if uBid fails to
predict with accuracy the resale prices for its purchased merchandise, uBid may
be forced to sell its inventory at a discount or at a loss, which would
adversely affect uBid's financial condition and results of operations.
If uBid fails to maintain satisfactory relationships with its suppliers, or is
unable to obtain sufficient quantities of merchandise, uBid's business would be
materially harmed.
uBid depends upon its suppliers to provide merchandise for sale through
uBid's Internet auctions. The availability of merchandise can be unpredictable.
Since its inception, uBid has sourced merchandise from over 430 suppliers.
Merchandise acquired from 20 of these suppliers represented approximately 51% of
uBid's gross merchandise sales for the fourth quarter of 1999. uBid does not
have long-term supply contracts with any of its suppliers. uBid cannot be
certain that its current suppliers will continue to sell or otherwise provide
merchandise for sale in uBid's auctions. uBid also cannot be certain that it
will be able to establish new supplier relationships that ensure merchandise
will be available for auction on its Website.
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<PAGE>
A limited number of uBid's suppliers process and ship merchandise directly
to uBid's customers. uBid has limited control over their shipping procedures,
and shipments by these suppliers could be delayed by factors beyond uBid's
control. Most merchandise uBid sells carries a warranty supplied either by the
manufacturer or the supplier. Although uBid is not obligated to accept
merchandise returns, uBid could be compelled to accept returns from customers
without receiving reimbursements from the suppliers or manufacturers if their
warranties are not honored. uBid's business will be significantly harmed if it
is unable to develop and maintain satisfactory relationships with suppliers on
acceptable commercial terms, if uBid is unable to obtain sufficient quantities
of merchandise, if the quality of service provided by these suppliers falls
below a satisfactory standard or if uBid's level of returns exceeds its
expectations.
uBid relies on third parties to maintain its critical systems and, if these
third parties fail to adequately perform their services, uBid could experience
disruptions in its operations.
uBid relies on a number of third parties for Internet and
telecommunications access, delivery services, credit card processing and
software services. uBid has limited control over these third parties and no
long-term relationships with any of them. For example, uBid does not own a
gateway onto the Internet. From time to time, uBid has experienced temporary
interruptions in its Website connection and its telecommunications access. Slow
Internet transmissions or prolonged interruptions in uBid's Website connection
or telecommunications access would materially harm uBid's business.
uBid uses UPS and Federal Express delivery services for substantially all
of its products. Should either or both be unable to deliver uBid's products for
a sustained time period as a result of a strike or other reason, uBid's business
would be harmed. In addition, uBid could experience delays in shipment due to
computer systems failures or other problems related to third-party service
providers.
uBid's internally developed auction software depends on operating system,
database and server software that was developed and produced by and licensed
from third parties. uBid has from time to time discovered errors and defects in
the software from these third parties and uBid relies to some extent on these
third parties to correct errors and defects in a timely manner. If uBid is
unable to develop and maintain satisfactory relationships with these third
parties on acceptable commercial terms, or if the quality of products and
services provided by these third parties falls below a satisfactory standard,
uBid could experience disruptions in its operations.
uBid's business may suffer from capacity constraints or system interruptions.
A key element of uBid's strategy is to generate a high volume of traffic to
its Website. uBid's revenues depend substantially on the number of customers who
use its Website to purchase merchandise. Accordingly, the satisfactory
performance, reliability and availability of uBid's Website, transaction-
processing systems, network infrastructure and delivery and shipping systems are
critical to uBid's operating results, as well as to uBid's reputation and
ability to attract and retain customers and maintain adequate customer service
levels.
Periodically, uBid has experienced minor systems interruptions, including
Internet disruptions, which uBid believes may continue to occur from time to
time. Any systems interruptions, including Internet disruptions, that make
uBid's Website inaccessible or reduce uBid's order fulfillment performance would
reduce the volume of goods uBid is able to sell, which could harm uBid's
business. uBid is continually enhancing and expanding its transaction processing
systems, network infrastructure, delivery and shipping systems and other
technologies to accommodate a substantial increase in the volume of traffic on
uBid's Website. uBid cannot assure you that it will be successful in these
efforts or that it will be able to accurately project the rate or timing of
increases, if any, in the use of its Website or timely expand and upgrade its
systems and infrastructure to accommodate these increases. uBid cannot assure
you that its network or its suppliers' networks will be able to timely achieve
or maintain a sufficiently high capacity of data transmission, especially if
uBid's Website traffic increases. If uBid fails to achieve or maintain its
capabilities for high capacity data transmission, consumer demand for its
services could decline.
uBid's failure to manage growth effectively could adversely affect uBid's
business and financial condition.
uBid has rapidly expanded its operations in a short period of time and
anticipates that it will have to continue this expansion to capture potential
market opportunities. uBid's rapid growth has significantly strained its
17
<PAGE>
management, operational and financial resources. uBid has expanded from two
employees at its inception to 281 employees and 61 full-time equivalent contract
personnel at December 31, 1999. uBid's revenues have increased from
approximately $9,000 in the period from uBid's inception to December 31, 1997 to
over $204.9 million in the year ended December 31, 1999. uBid expects to
continue to add additional key personnel in the future. Increases in the number
of employees and the volume of merchandise sales have placed significant demands
on uBid's management.
To manage its expected growth, uBid will have to expand existing
operations, particularly customer service and merchandising, and improve
existing and implement new operational, financial and inventory systems,
procedures and controls. uBid also will have to maintain relationships with the
following parties to control uBid's strategic direction in a rapidly changing
environment:
<TABLE>
<S> <C>
. merchandise suppliers; . other Websites; and
. freight companies; . Internet service providers.
. warehouse operators;
</TABLE>
uBid also cannot assure you that its management will be able to identify,
hire, train, retain, motivate and manage required personnel or that its
management will be able to manage and exploit existing and potential market
opportunities successfully. If uBid is unable to manage uBid's growth
effectively, uBid's business will be harmed.
uBid may not be able to sustain or grow its business unless it keeps up with
rapid technology changes.
The Internet and electronic commerce industries are characterized by:
<TABLE>
<S> <C>
. rapidly changing technology; . evolving industry standards and practices that could
render uBid's Website and proprietary technology
. changes in consumer demands; obsolete.
. frequent introductions of new services or products
that embody new technologies; and
</TABLE>
uBid's future performance will depend, in part, on its ability to license
or acquire leading technologies, enhance its existing services and respond to
technological advances and emerging industry standards and practices on a timely
and cost-effective basis. Developing Website and other proprietary technology
involves significant technical and business risks. uBid also cannot assure you
that it will be able to successfully use new technologies or adapt its Website
and proprietary technology to emerging industry standards. uBid may not be able
to remain competitive or sustain growth if it does not adapt to changing market
conditions or customer requirements.
Increasing governmental regulation of the Internet could adversely affect uBid's
business.
uBid is currently not regulated by any government agency, other than
regulations applicable to businesses generally, laws applicable to auction
companies and auctioneers, and laws or regulations directly applicable to
Internet commerce. However, due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet, covering issues such as user privacy, pricing,
sales tax, and characteristics and quality of products and services.
Furthermore, the growth and development of Internet commerce may prompt calls
for more stringent consumer protection laws that may impose additional burdens
on companies conducting business over the Internet. New laws or regulations may
decrease the growth of the Internet, which, in turn, could decrease the demand
for uBid's Internet auctions and increase uBid's cost of doing business. The
applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, auction regulation, sales tax,
libel and personal privacy is uncertain and may take years to resolve.
18
<PAGE>
The tax treatment of the Internet and electronic commerce is currently
unsettled. A number of proposals have been made at the federal, state and local
level and by some foreign governments that could impose taxes on the sale of
goods and services and other Internet activities. In October 1998, the Internet
Tax Freedom Act imposed a three-year moratorium on new state and local taxes on
Internet commerce. However, it is possible that future laws imposing taxes or
other regulations on commerce over the Internet could substantially impair the
growth of electronic commerce and as a result have a negative effect on uBid's
business.
In addition, because its service is available over the Internet in multiple
states and because it sells merchandise to consumers resident in multiple
states, uBid could be required to qualify to do business as a foreign
corporation in each state in which its services are available. uBid is qualified
to do business in only three states, and its failure to qualify as a foreign
corporation in a jurisdiction where it is required to do so could subject uBid
to taxes and penalties for the failure to qualify. Any new legislation or
regulation, or the application of laws or regulations from jurisdictions whose
laws do not currently apply to uBid's business, could have a material adverse
effect on uBid's business.
uBid's business may be adversely affected if uBid loses key personnel.
uBid's future performance depends substantially on the continued service of
its senior management and other key personnel. In particular, uBid's success
depends upon the continued efforts of its management personnel, including chief
executive officer and president Gregory K. Jones and other members of uBid's
senior management team. uBid has a long-term employment agreement with only one
of its key personnel, Mr. Jones, and has no key person life insurance.
uBid's business will suffer if uBid does not attract and retain additional
highly skilled personnel.
To meet its expected growth, uBid believes that its future success will
depend upon its ability to hire, train and retain other highly-skilled
personnel. Competition for quality personnel is intense. uBid cannot be sure
that it will be successful in hiring, assimilating or retaining the necessary
personnel, and uBid's failure to do so could adversely affect its business and
financial condition.
uBid may suffer disruption in its business because of changes in its systems,
facilities and fulfillment activities.
uBid believes that its success is dependent in large part upon its ability
to provide prompt and efficient service to its customers. As a result, any
disruption of uBid's day-to-day operations could have a material adverse effect
on its business, and any failure of uBid's information management systems or
distribution capabilities could impair its ability to receive and process
customer orders and ship products on a timely basis.
uBid expects to upgrade its software and hardware systems on a continuing
basis. uBid is considering outsourcing warehouse and fulfillment
responsibilities for some of its products. The transition to, or upgrading of
uBid's hardware and software systems, and the outsourcing of some of uBid's
fulfillment activities could result in delays, failures or execution
difficulties that could impair uBid's ability to receive and process orders and
ship products in a timely manner.
To date, uBid has had various interruptions to its service as a result of
loss of power and telecommunications connections. uBid's insurance coverage may
not be adequate to compensate for all losses that may occur as a result of any
future service interruptions. Although uBid has implemented network security
measures and firewall security, its servers are also vulnerable to computer
viruses, physical or electronic break-ins, attempts by third parties to overload
uBid's systems and similar disruptive problems. Any of these problems could
cause interruptions, delays, loss of data or cessation in service to uBid's
users. If any of these events occur, uBid's business, prospects and financial
condition could be significantly harmed.
Concerns about transaction security on the Internet may hinder uBid's business.
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. uBid
relies on encryption and authentication technology licensed from third
19
<PAGE>
parties to provide the required security and authentication to ensure the
privacy of Internet transactions. Advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments may
result in a compromise or breach of the algorithms uBid uses to protect customer
transaction data. Any breaches in security could cause a significant decrease in
the use of uBid's Website, which would materially harm uBid's business.
A person successfully circumventing uBid's security measures could
misappropriate proprietary information or cause interruptions in uBid's
operations. uBid could be required to expend significant capital and other
resources to protect against the threat of security breaches or to alleviate
problems caused by these breaches. Consumer concerns about the security of
electronic commerce and user privacy may also inhibit the growth of the Internet
as a means of conducting commercial transactions. To the extent that uBid's
activities or the activities of third party contractors involve storing and
transmitting proprietary information, such as credit card numbers, security
breaches could expose uBid to a risk of loss or litigation and possible
liability. uBid's security measures may not effectively prevent security
breaches, and uBid's failure to prevent security breaches could significantly
disrupt its operations.
uBid's business could be adversely affected if uBid is unable to adequately
protect its proprietary technology.
uBid's proprietary technology is one of the keys to its performance and
ability to remain competitive. uBid relies on a combination of trademark,
copyright and trade secret laws to establish and protect its proprietary rights.
uBid also uses technical measures, confidentiality agreements and non-compete
agreements to protect its proprietary rights. uBid's uBid service mark is
registered in the United States. However, uBid may not be able to secure
significant protection for its service marks or trademarks. uBid's competitors
or others could adopt product or service names similar to "uBid" or uBid's other
service marks or trademarks. Any of these actions by others might impede uBid's
ability to build brand identity and could lead to customer confusion. uBid's
inability to protect the name uBid adequately could adversely affect its
business and financial condition.
uBid relies on copyright laws to protect its proprietary software and trade
secret laws to protect the source code for its proprietary software. uBid
generally enters into agreements with its employees and consultants and limits
access to and distribution of its software, documentation and other proprietary
information. The steps uBid takes to protect its proprietary information may not
prevent misappropriation of its technology, and the agreements uBid enters into
for that purpose might not be enforceable. A third party might obtain and use
uBid's software or other proprietary information without authorization or
develop similar software independently. It is difficult for uBid to police for
unauthorized use of its technology, particularly because the global nature of
the Internet makes it difficult to control the ultimate destination or security
of software or other transmitted data. The laws of other countries may not
provide uBid with adequate or effective protection of uBid's intellectual
property.
uBid may infringe on third party intellectual property rights and could become
involved in costly intellectual property litigation.
uBid could be sued by other parties claiming infringement by uBid's
software or other aspects of uBid's business. uBid is not currently involved in
any suit that would have a material effect on its business.
However, any future claims, with or without merit, could impair uBid's
business and financial condition because they could:
<TABLE>
<S> <C>
. result in significant litigation costs; . divert the attention of management; or
. divert resources; . require uBid to enter into royalty and licensing
agreements which may not be available on terms
acceptable to it or at all.
</TABLE>
In the future, uBid may also file lawsuits to enforce its intellectual
property rights, to protect its trade secrets, or to determine the validity and
scope of the proprietary rights of others. Litigation over these issues,
20
<PAGE>
whether successful or unsuccessful, could result in substantial costs and
diversion of resources, which could adversely affect uBid's business and
financial condition.
uBid may experience unexpected expenses or delays in service enhancements if
uBid is unable to license third party technology on commercially reasonable
terms.
uBid relies on a variety of technology that it licenses from third parties.
These third-party technology licenses might not continue to be available to uBid
on commercially reasonable terms or at all. If it is unable to obtain or
maintain these licenses on favorable terms, or at all, uBid could experience
delays in completing and developing its proprietary software. These delays could
significantly harm uBid's business and financial condition.
uBid may encounter barriers to international expansion, which could limit its
future growth and adversely impact its business and financial condition.
uBid intends to continue to expand its operations internationally. uBid
does not currently have any Website content that has been localized for foreign
markets, and may not be able to establish a global presence. uBid's expansion
into international markets will require significant management attention and
financial resources.
Engaging in business on a global level carries inherent risks which could
adversely impact uBid's business and financial condition, such as:
<TABLE>
<S> <C>
. differing regulatory requirements; . longer payment cycles;
. export restrictions; . problems in collecting accounts receivable;
. tariffs and other trade barriers; . political instability;
. difficulties in staffing and managing foreign . fluctuations in currency exchange rates; and
operations;
. potentially adverse tax consequences
. difficulties in protecting uBid's intellectual
property rights;
</TABLE>
In addition, some types of software that contain encryption technology are
restricted by export laws and uBid could become subject to liability for any
violations of these export restrictions. uBid may not be able to successfully
market, sell and distribute its products in foreign markets. One or more of
these factors could have a material adverse effect on uBid's future global
operations, and consequently, on uBid's business and financial condition as a
whole.
uBid's stock price is volatile, which could lead to losses by investors and
costly securities litigation.
The trading price of uBid's common stock has been and is likely to continue
to be highly volatile and could fluctuate in response to factors such as:
21
<PAGE>
<TABLE>
<S> <C>
. actual or anticipated variations in uBid's . changes in the market valuations of other Internet or
quarterly operating results; online service companies;
. announcements of technological innovations by uBid . announcements by uBid or its competitors of
or its competitors; significant acquisitions, strategic partnerships, joint
ventures or capital commitments;
. adoption of new accounting standards affecting the
retail or Internet industry; . additions or departures of key personnel;
. introduction of new services by uBid or its . sales of uBid's common stock or other securities in
competitors; the open market; and
. changes in financial estimates by securities . other events or factors, many of which are beyond
analysts; uBid's control.
. conditions or trends in the Internet and online
commerce industries;
</TABLE>
The stock market has experienced significant price and volume fluctuations,
and the market prices of stock in technology companies, particularly Internet-
related companies, have been highly volatile. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been initiated against these companies. Litigation
initiated against uBid, whether or not successful, could result in substantial
costs and diversion of uBid's management's attention and resources, which would
have a material adverse effect on uBid's business and financial condition.
CMGI's stock price is volatile and the value of CMGI common stock issued in the
merger will depend on its market price at the time of the merger, and no
adjustment will be made as a result of changes in the market price of CMGI's
common stock.
At the closing of the merger, each share of uBid common stock will be
exchanged for .2628 shares of CMGI common stock. This exchange ratio will not be
adjusted for changes in the market price of CMGI common stock or of uBid common
stock. In addition, neither CMGI nor uBid may terminate or renegotiate the
merger agreement, and uBid may not resolicit the vote of its stockholders solely
because of changes in the market price of CMGI common stock or of uBid common
stock. Any reduction in CMGI's common stock price will result in you receiving
less value in the merger at closing. You will not know the exact value of CMGI's
common stock to be issued to uBid stockholders in the merger at the time of the
special meeting of uBid stockholders.
The market price of CMGI's common stock, like that of the shares of many
other high technology and Internet companies, has been, and will likely continue
to be, volatile. For example, from January 4, 1999 to January 4, 2000, CMGI
common stock traded as high as $163.50 per share and as low as $13.53 per share.
Recently, the stock market in general and the shares of Internet companies
in particular have experienced significant price fluctuations. The market price
of CMGI's common stock may continue to fluctuate significantly in response to
various factors, including:
<TABLE>
<S> <C>
. quarterly variations in operating results or growth . announcements of mergers and acquisitions and other
rates; actions by competitors;
. the announcement of technological innovations; . regulatory and judicial actions;
. the introduction of new products; . general economic conditions; and
. changes in estimates by securities analysts; . patents and other intellectual property rights issued
</TABLE>
22
<PAGE>
<TABLE>
<S> <C>
. market conditions in the industry; to competitors of CMGI.
. announcements of mergers and acquisition by CMGI;
</TABLE>
CMGI has agreed to guarantee any tax indemnification obligation of uBid to
Creative Computers that may arise following the effective time of the merger and
if such an obligation arises, it may be significant.
CMGI has agreed to guarantee any tax indemnification obligation of uBid to
Creative Computers that may arise following the effective time of the merger
arising out of actions by uBid after the spin-off of uBid by Creative Computers,
including transactions similar to the merger, that would disqualify the spin-off
as a tax-free distribution or make the spin-off taxable to Creative Computers
for federal income tax purposes. If the spin-off were taxable due to uBid's
actions, for example, as a result of the merger, uBid would face an indemnity
obligation to Creative Computers of approximately $100 million. This indemnity
obligation could have a significant material adverse effect on CMGI's business
and financial condition.
CMGI may face challenges in integrating CMGI and uBid and, as a result, may not
realize the expected benefits of the anticipated merger.
Integrating the operations and personnel of CMGI and uBid will be a complex
process, and CMGI is uncertain that the integration will be completed rapidly or
will achieve the anticipated benefits of the merger. Since uBid is located in
the Midwest, it will be more difficult to retain employees of uBid if, after the
merger, some of the activities and management of uBid move from the Midwest to
the East Coast. The successful integration of CMGI and uBid will require, among
other things, integration of their finance, human resources and sales and
marketing groups and coordination of development efforts. The diversion of the
attention of CMGI's management and any difficulties encountered in the process
of combining the companies could cause the disruption of, or a loss of momentum
in, the activities of CMGI's business. Further, the process of combining CMGI
and uBid could negatively affect employee morale and the ability of CMGI to
retain some of its key employees after the merger.
If CMGI does not successfully integrate uBid or the merger's benefits do not
meet the expectations of financial or industry analysts, the market price of
CMGI common stock may decline.
The market price of CMGI common stock may decline as a result of the merger
if:
. the integration of CMGI and uBid is unsuccessful;
. CMGI does not achieve the perceived benefits of the merger as rapidly as, or
to the extent anticipated by, financial or industry analysts; or
. the effect of the merger on CMGI's financial results is not consistent with
the expectations of financial or industry analysts.
If CMGI does not manage the integration of other acquired companies
successfully, it may be unable to achieve desired results.
As a part of its business strategy, CMGI may enter into additional business
combinations, strategic investments and acquisitions such as with Tallan, Inc.
Acquisitions are typically accompanied by a number of risks, including:
23
<PAGE>
<TABLE>
<S> <C>
. the difficulty of integrating the operations and . the maintenance of uniform standards, controls,
personnel of the acquired companies; procedures and policies;
. the potential disruption of CMGI's ongoing business . the impairment of relationships with employees and
and distraction of management; customers as a result of any integration of new
management personnel; and
. the difficulty of incorporating acquired technology
and rights into CMGI's products and services; . potential unknown liabilities associated with
acquired businesses.
. unanticipated expenses related to acquired
technology and its integration into existing
technology;
</TABLE>
CMGI may not succeed in addressing these risks or any other problems
encountered in connection with potential business combinations, strategic
investments and acquisitions, potentially disrupting CMGI's business and causing
increased losses.
Failure to complete the merger with CMGI could harm uBid's stock price and
future business and operations.
Although uBid entered into an agreement with CMGI to merge with its
subsidiary and become a subsidiary of CMGI, completion of the merger is subject
to several closing conditions, including obtaining regulatory approvals and
stockholder approval, the receipt of specified legal assurances, and the absence
of certain adverse changes. Although the merger is expected to be completed in
May 2000, and the merger agreement provides for a closing by no later than
August 31, 2000, it is possible that the merger may not be completed.
Failure to complete the merger could negatively impact the market price of uBid
common stock and uBid's operating results.
If the merger is not completed for any reason, uBid may be subject to a
number of material risks, including:
. uBid may be required to pay CMGI a termination fee of up to $20 million
and/or reimburse CMGI for expenses of up to $500,000;
. the market price of uBid common stock may decline to the extent that the
current market price of uBid common stock reflects a market assumption
that the merger will be completed; and
. costs related to the merger, such as legal and accounting fees, must be
paid even if the merger is not completed.
If the merger is terminated and the uBid board of directors seeks another
merger or business combination, no assurance can be given that uBid will be able
to find a partner willing to pay an equivalent or more attractive price than the
price to be paid by CMGI in the merger.
uBid may not be able to enter into a merger or business combination with another
party at a favorable price because of restrictions in the merger agreement.
While the merger agreement is in effect, subject to specified exceptions,
uBid is prohibited from entering into or soliciting, initiating or encouraging
any inquiries or proposals that may lead to a proposal or offer for a merger,
consolidation, business combination, sale of substantial assets, tender offer,
sale of shares of capital stock or other similar transactions with any person
other than CMGI. As a result of this prohibition, uBid may not be able to enter
into an alternative transaction at a favorable price.
24
<PAGE>
uBid's officers and directors have conflicts of interest that may influence them
to support or approve the merger.
The directors and officers of uBid participate in arrangements and have
continuing indemnification against liabilities that provide them with interests
in the merger that are different from, or in addition to, yours, including the
following:
<TABLE>
<S> <C>
. as of March 1, 2000, the executive officers and . certain officers of uBid have entered into employment
directors of uBid owned stock or options to purchase agreements with CMGI pursuant to which these officers
an aggregate of 1,314,814 shares of uBid common will receive options to purchase uBid common stock
stock, of which approximately 1,061,497 represent following the merger;
options which are unvested. If the merger is
completed, on or about April 30, 2000 approximately . upon completion of the merger, CMGI and uBid may
577,384 of the unvested options will accelerate and enter into employment agreements with additional
become immediately exercisable prior to the effective officers of uBid; and
time of the merger;
. CMGI has agreed to cause the surviving corporation in
. directors and officers and their respective the merger to indemnify each present and former uBid
affiliates, representing a significant percentage of officer and director against liabilities arising out of
uBid stockholders, have agreed to vote in favor of such person's services as an officer or director. CMGI
the merger agreement and the merger; will cause the surviving corporation to maintain
officers' and directors' liability insurance to cover
. certain officers of uBid are entitled to certain any such liabilities for the next six years.
benefits, including substantial severance packages,
under their employment agreements with uBid if their
employment is terminated upon uBid's change of
control, such as in the merger;
</TABLE>
The directors and officers of uBid may therefore have been more likely to
vote to approve the merger agreement and the merger than if they did not have
these interests. uBid stockholders should consider whether these interests may
have influenced these directors and officers to support or recommend the merger.
Uncertainties associated with the merger may cause uBid to lose key personnel.
Current and prospective uBid employees may experience uncertainty about
their future roles with CMGI. This uncertainty may adversely affect uBid's
ability to attract and retain key management, sales, marketing and technical
personnel.
Customers of CMGI and uBid may delay or cancel orders as a result of concerns
over the merger.
The announcement and closing of the merger could cause customers and
potential customers of CMGI and uBid to delay or cancel contracts for services.
In particular, customers could be concerned about future service offerings and
integration support of current services. Moreover, they may terminate their
relationship with uBid because they deem themselves competitors of CMGI. Such a
delay or cancellation of orders could have a material adverse effect on the
business, results of operations and financial condition of CMGI or uBid.
Item 2. Properties
uBid's principal administrative, engineering, merchandising and marketing
facilities total approximately 25,000 square feet and are located in Chicago,
Illinois under a lease that expires in 2002. In January 2000, uBid entered into
an additional lease under the same terms at its principal facility in Chicago
for an additional 11,000 square feet. Until July 1998, uBid was dependent on
Creative for warehousing and distribution services. In July 1998, uBid became
responsible for its own warehousing and distribution and entered into a sublease
for 100,000 square feet of Creative's 325,000 square foot distribution center in
Memphis, Tennessee. In October 1999, uBid
25
<PAGE>
entered into a sublease which provides for the continued use of Creative's
inventory control and shipping systems during the term of the sublease. The
sublease is at a monthly rate equal to Creative's obligation to the landlord,
plus taxes and utilities, and will expire in 2002. In December 1999, uBid
subleased an additional 70,000 square feet at Creative's distribution center in
Memphis that expires in 2002. In February 2000, uBid entered into a lease for a
20,000 square feet Customer Care Center located in Danville, Illinois that
expires in 2003. uBid believes that it has adequate space for its current needs.
As it expands, uBid will have to find suitable additional space, and uBid cannot
be certain that suitable space will be available on commercially reasonable
terms. uBid is considering outsourcing some of its warehouse and fulfillment
responsibilities.
Item 3. Legal Proceedings
From time to time uBid may be named in claims arising in the ordinary
course of business. Currently, no legal proceedings or claims are pending
against or involve uBid that, in the opinion of uBid's management, could
reasonably be expected to have a material adverse effect on uBid's business and
financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Price of Common Stock
uBid's Common Stock is traded on the Nasdaq National Market under the
symbol "UBID." The table below presents high and low closing price information
for the Common Stock by quarter as reported on Nasdaq from December 4, 1998, the
date uBid's Common Stock commenced trading, to December 31, 1999. Prior to
such time, there was no public market for uBid 's Common Stock.
<TABLE>
<CAPTION>
1998 High Low
- ---- ---- ---
<S> <C> <C>
Fourth Quarter (commencing December 4, 1998)............................. $188.00 $33.00
<CAPTION>
1999 High Low
- ---- ---- ---
<S> <C> <C>
First Quarter............................................................ $134.06 $53.88
Second Quarter........................................................... $ 69.13 $21.63
Third Quarter............................................................ $ 33.94 $16.44
Fourth Quarter........................................................... $ 44.50 $26.19
</TABLE>
On March 22 1999, the last sale price of uBid 's Common Stock as quoted on
Nasdaq was $32.44. As of March 22, 1999, the number of stockholders of record of
uBid's Common Stock was 101. uBid has not paid any cash dividends to date and
currently intends to retain any earnings for use in business and does not
anticipate paying any cash dividends in the foreseeable future.
26
<PAGE>
Item 6. Selected Financial Data
Set forth below is certain selected financial and operating data of uBid
for the periods indicated, which have been derived from uBid's audited financial
statements. The selected financial data set forth below should be read in
conjunction with uBid's financial statements and notes thereto included
elsewhere in this Form 10-K and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Inception
(April 1, 1997) Years Ended
to December 31, December 31,
-----------------------------------------
1997 1998 1999
------------------- --------------------- ------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Statement of Operations Data:
Net revenues..................................................... $ 9 $ 48,232 $ 204,925
Gross profit..................................................... 1 3,975 19,127
Loss from operations............................................. (287) (9,999) (26,700)
Net loss......................................................... (313) (10,169) (25,495)
Basic and diluted net loss per share (1)......................... (0.04) (1.36) (2.61)
Shares used to compute basic and diluted net loss per share (1).. 7,329,883 7,461,061 9,765,366
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1999
----------------- ------------------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................................ $26,053 $51,544
Working capital.......................................................... 21,445 40,719
Total assets............................................................. 34,625 79,266
Note payable to Creative - long term portion............................. 3,331 -
Total stockholders' equity (deficit)..................................... 18,633 45,262
</TABLE>
----------------
(1) Computed by dividing loss attributable to common stockholders by shares
used in basic and diluted net loss per share. See Note 1 of Notes to
Financial Statements for an explanation of the determination of the number
of shares used in computing basic and diluted net loss per share.
27
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Management's Discussion and Analysis of Financial Condition and Results
of Operations which follows contains forward-looking statements which involve
risks and uncertainties. As a result of certain factors, uBid's actual results
could differ materially from those anticipated in these forward-looking
statements. The following discussion should be read in conjunction with the
financial statements and notes thereto included in this Report. The historical
information included in this Report does not necessarily reflect what uBid's
financial condition and results of operations would have been had uBid been
operated as an independent entity during the periods presented and may not be
indicative of future performance.
Overview
uBid operates a leading online auction marketplace offering products to
consumers and businesses. uBid's auctions currently feature a rotating selection
of brand name products that typically sell at significant discounts to prices at
traditional retailers. uBid currently runs auctions seven days a week, offering
on average over 6,700 items in each of its daily auctions. From uBid's first
auction in December 1997 through December 31, 1999, uBid auctioned over 1.6
million merchandise units, registered over 1,030,000 users and recorded more
than 135.3 million visits to its website. uBid's net loss of $36.0 million from
its inception to December 31, 1999 was principally due to investments in
infrastructure, sales and marketing expenditures to support future growth, and
stock option compensation expense. uBid expects to continue to experience losses
for the foreseeable future as it continues to make significant investments in
building its customer base and operating infrastructure including increased
expenditures for sales and marketing.
uBid obtains merchandise directly from over 430 manufacturers, distributors
and retailers. In May 1999, uBid launched the uBid Auction Community, which
provides approved suppliers access to the uBid website to place products for
direct auction to customers.
In June 1999, uBid entered into an agreement, amended February 9, 2000,
with LibertyOne, an Australian media company, to provide LibertyOne access to
uBid's auction technology and brand name in exchange for a licensing fee,
payments for professional services and future royalties from its auction sales
in certain East Asian countries, certain Southeast Asian countries, Australia
and New Zealand. In September 1999, uBid completed its obligations to transfer
its auction technology software and in November 1999, uBid announced the launch
of uBid.com.au, its affiliated website in Australia.
uBid either purchases merchandise outright or acquires the right to sell
the merchandise under consignment-type relationships with suppliers on a revenue
sharing basis. When uBid purchases merchandise outright, uBid bears both
inventory and price risk. Under revenue sharing arrangements, uBid purchases the
inventory upon completion of the auction, takes title to the merchandise,
invoices the customer and bears the credit and return risks. Under both types of
transactions, whether purchased inventory or revenue sharing, uBid recognizes
the full sales amount as revenue after it verifies the credit card transaction
authorization and ships the merchandise. When the credit card authorization has
been received but the merchandise has not been shipped, uBid defers revenue
recognition until the merchandise is shipped. uBid offers credit to some of its
business customers that have been pre-qualified as having appropriate credit
ratings, and accordingly, uBid will have to manage the associated risks of
accounts receivable expansion and collection.
Through December 31, 1999, uBid has incurred expenses related to
establishing itself as an independent company of approximately $400,000 and uBid
has spent a total of approximately $1.8 million in capital expenditures to fully
establish itself as an independent company. These expenditures include warehouse
and distribution equipment, hardware and software for computer systems and
furniture and fixtures. uBid expects to fund its purchase of capital equipment
with working capital. As of the spin-off date, uBid terminated a services
agreement with Creative, pursuant to which Creative provided uBid with various
administrative services. Since that time, uBid has engaged third parties to
perform some of these services and has internally performed other services.
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Due to uBid's historical dependence on Creative for funding and certain
services, uBid's ability to grow prior to its initial public offering was
constrained by the allocation of resources made by Creative. uBid's growth had
also been constrained by its inability to sell and ship products internationally
due to contractual restraints on Creative and because uBid had been precluded
from selling certain lines of merchandise as a result of agreements to which
Creative is subject. Following uBid's spinoff from Creative, uBid was no longer
subject to these restrictions.
uBid has an extremely limited operating history upon which to base an
evaluation of its business and prospects. uBid's business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as electronic commerce.
Although uBid has experienced significant growth in revenue since commencing
operations, there can be no assurance that uBid's revenue will continue at its
current level or rate of growth. uBid's revenue depends substantially upon the
level of auction activity on its website. In addition, uBid has relatively low
gross margins and plans to increase its operating expenses significantly by
increasing the size of its staff, expanding its marketing efforts, purchasing
larger volumes of merchandise to be sold at auction and building a larger
infrastructure to support planned growth. Increases in operating expenses
preceding or not subsequently followed by increased revenue, could have a
material adverse effect on uBid's business, results of operations and financial
condition.
Beginning in October 1997, uBid granted stock options to attract and retain
key employees. These options were exercisable only in the event of a successful
initial public offering or sale of uBid. The completion of uBid's initial
public offering on December 4, 1998 caused a new measurement date to occur,
requiring uBid to compute compensation expense based upon the difference between
the exercise price of the options and the IPO price. uBid recorded anon-cash
compensation expense charge of $13.3 million in connection with stock options
granted prior to the IPO at prices less than the initial public offering price
of its common stock. The compensation charge will be recognized over the five-
year vesting period of such options. Accordingly, uBid recorded a compensation
expense of $5.3 million in the fourth quarter of 1998 and $3.5 million for the
year ended December 31, 1999.
Results of Operations
Years Ended December 31, 1998 and 1999
Net Revenues. Net revenues are comprised of gross merchandise sales plus
shipping revenue net of returns. uBid held its first auction the last week of
December 1997. For the year ended December 31, 1999, net revenues increased to
$204.9 million, an increase of 324.9%, from $48.2 million for the year ended
December 31, 1998. Growth in net revenues resulted from significant growth in
uBid's customer base, an expanded selection of merchandise offered and an
increase in the number of auctions per week. uBid intends to increase traffic to
its website, further allowing uBid to broaden its customer base, increase the
number of auctions per week and expand the selection and number of items
offered.
Gross Profits. Gross profits are comprised of net revenues minus the cost
of merchandise, shipping and shipping-related expenses, net of returns. Gross
profits are affected by uBid's ability to cost-effectively source merchandise
and attract sufficient traffic to its website to achieve a favorable balance
between the number of bidders and the amount of merchandise auctioned. In
addition, uBid's gross profits could be affected by its capability to continue
to expand into software licensing arrangements and similar commission and fee
based arrangements. Gross profits for the year ended December 31, 1999 increased
to $19.1 million from $4.0 million for the year ended December 31, 1998. As a
percent of net revenues, gross profit for the year ended December 31, 1999 was
9.3%, an increase from 8.2% for the year ended December 31, 1998. The increase
in gross profit percentage was due to the recognition of software licensing and
advertising revenues.
Operating Expenses. Operating expenses have increased significantly since
uBid's inception. This trend is expected to continue as uBid expands its
operations to increase its customer base, enhance its brand name and increase
its market share, all of which will require significant increases in marketing
and advertising, additional personnel, enhancements to uBid's website and
further development of its infrastructure. Creative provided uBid with
administrative services (accounting, human resources, legal) (through June
1999), warehousing and distribution services (through June 1998), and
Internet/telecom and joint marketing services (through September 1999). The
costs of these services as a percent of total operating expenses have declined
each year since uBid's inception. uBid
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expects that these costs will continue to decline as a percent of total
operating expenses and in absolute dollars in the future. Since the spin-off,
uBid has had to perform certain administrative and transactional services or
engage third parties to perform those services. uBid does not expect that the
costs associated with the transition to internal and third party administration
and transaction processing will be material.
Sales and Marketing. Sales and marketing expenses consist primarily of
advertising and promotional expenditures, as well as payroll and related
expenses for sales and marketing personnel. For the year ended December 31,1999,
sales and marketing expenses increased to $22.2 million from $2.8 million for
the year ended December 31, 1998. Sales and marketing expenses as a percent of
net revenues were 10.8% for the year ended December 31, 1999, an increase from
5.9% for the year ended December 31, 1998. These expenses have increased due to
increasing advertising expenditures and personnel additions. uBid expects sales
and marketing expenses to increase significantly in absolute dollars in order to
increase its customer base.
uBid has established marketing relationships with a number of online
companies including AOL, MSN/LinkExchange, MSN/Hotmail, PCWorld Online,
LookSmart, Prodigy and Road Runner to increase uBid's access to online customers
and build brand recognition. Under these arrangements, uBid receives portal
positioning, anchor tenancy, promotional placements, sponsorships and/or banner
advertisements for a monthly fee. Generally, these agreements have terms up to
three years, do not provide for a guaranteed renewal and may be terminated by
uBid without cause. uBid's payments to these online companies for the year ended
December 31, 1999 were approximately $4.1 million and its payments in 2000 under
these agreements will be approximately $5.1 million, which does not include
certain additional fees such as payments for producing a certain level of new
registrations. uBid expects to enter into additional marketing relationships
with other online companies to increase its customerbase.
Technology and Development. Technology and development expenses consist
primarily of payroll and related expenses for systems personnel who develop
uBid's website and related systems, charges relating to hosting of its website
and Internet/telecom operations, and amortization of capitalized software
development costs. For the year ended December 31, 1999, technology and
development expenses increased to $4.1 million from $1.0 million for the year
ended December 31, 1998. Technology and development costs as a percent of net
revenues were 2.0% for the year ended December 31, 1999, a slight decrease
compared to 2.1% for the year ended December 31, 1998. uBid expects technology
and development expenses to increase in absolute dollars in the future as uBid
expands its operations.
General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses, warehousing and distribution, credit
card processing, accounting and administration, customer service, merchandising,
and executive and other general corporate expenses. Until the spin-off date,
Creative provided certain general and administrative services for credit card
processing, accounting and benefits administration. For the year ended December
31, 1999, general and administrative expenses increased to $16.1 million from
$4.9 million for the year ended December 31, 1998. General and administrative
expenses have increased primarily due to costs to support increased sales such
as credit card processing and distribution expenses and the hiring of additional
personnel. General and administrative expenses as a percent of net revenues were
7.8% for the year ended December 31, 1999, a decrease from 10.1% for the year
ended December 31, 1998. uBid expects general and administrative expenses to
increase in absolute dollars in the future as uBid expand its operations.
Stock Option Compensation Expense. Prior to uBid's initial public offering,
uBid had granted 1,038,278 options to purchase common stock at prices less than
the $15.00 per share initial public offering price. These options were
exercisable only in the event of a successful initial public offering or sale of
uBid. The completion of uBid's initial public offering on December 4, 1998
caused a new measurement date to occur, requiring uBid to compute compensation
expense based upon the difference between the exercise price of the options and
the IPO price. Based upon the difference between the IPO price of $15.00 per
share and the exercise prices of the 1,038,278 options outstanding at December
4, 1998, the total stock option compensation charge was $13.3 million, which
will be amortized over the vesting periods of the outstanding options. uBid
recognized approximately $3.5 million of this charge in the year ended December
31, 1999 and $5.3 million of this charge in the year ended December 31, 1998.
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Income Taxes. uBid has had a net loss since its inception in 1997 and
expect to incur losses for the foreseeable future. No benefit for income taxes
was provided in 1997, 1998 or 1999 due to the uncertainty of realization of
these benefits in future years.
Net Loss. Based on the foregoing information, uBid had a net loss of $25.5
million for the year ended December 31, 1999, compared to $10.2 million for the
year ended December 31, 1998. The loss in the year ended December 31, 1999 was
due in part to sales and marketing expenditures, investments in infrastructure
as uBid continued to expand its sales operations, and a non-cash charge for
amortization of stock compensation expense related to pre-IPO stock options.
uBid expects to continue to experience losses for the foreseeable future as uBid
continues to make significant investments in building its customer base and
operating infrastructure.
Period from April 1, 1997 (inception) to December 31, 1997 and Year Ended
December 31, 1998
Net Revenues. uBid held its first auction the last week of December 1997.
For the year ended December 31, 1998, net revenues were $48.2 million. Growth in
net revenues was due to significant growth in its customer base, an expanded
selection of merchandise offered and an increase in the number of auctions per
week.
Gross Profits. Gross profits for the year ended December 31, 1998 were $4.0
million. As a percent of net revenues, uBid's gross margin was 8.2% for the year
ended December 31, 1998. Gross margin is affected by uBid's ability to cost-
effectively source merchandise and attract sufficient traffic to its Website to
achieve a favorable balance between the number of bidders and the amount of
merchandise auctioned. Merchandise acquired from Creative represented over 90%
of the merchandise sold in the first two months of operations, decreasing to
approximately 30% in March and April 1998, and represented less than 10% for
1998.
Operating Expenses. uBid's operating expenses have increased significantly
since its inception. This trend is expected to continue as uBid continues to
expand its operations to increase its customer base, enhance its brand name and
increase its market share, all of which will require significant increases in
marketing and advertising, additional personnel, enhancements to uBid's Website
and further development of its infrastructure. Creative provided administrative
(accounting, human resources, legal) (through June 1999), warehousing and
distribution (through June 1998), and Internet/telecom and joint marketing
services (through September 1999) to uBid. The cost of these services
represented 72% and 21% of uBid's total operating expenses from its inception to
December 31, 1997 and for the year ended December 31, 1998, respectively.
Sales and Marketing. Sales and marketing expenses were approximately
$10,000 and $2.8 million from uBid's inception to December 31, 1997 and for the
year ended December 31, 1998, respectively. Sales and marketing expenses as a
percent of net revenues were 5.9% for the year ended December 31, 1998. These
expenses have increased significantly each month of operations due to increasing
advertising expenditures and personnel additions.
Technology and Development. Technology and development expenses were
approximately $66,000 and $1.0 million from uBid's inception to December 31,
1997 and for the year ended December 31, 1998, respectively. Technology and
development costs as a percent of net revenues were 2.1% for the year ended
December 31, 1998. In addition to the expenses in 1997, uBid capitalized
approximately $267,000 relating to the development of the core software for
uBid's Website. These costs are being amortized over three years. The increase
in technology and development expenses during 1998 was primarily attributable to
increased staffing and associated costs relating to enhancing the features and
functionality of uBid's Website and related systems.
General and Administrative. General and administrative expenses were
approximately $212,000 and $4.9 million for the period from uBid's inception to
December 31, 1997 and for the year ended December 31, 1998, respectively.
General and administrative expenses as a percent of net revenues were 10.1% for
the year ended December 31, 1998. Creative supplied general and administrative
services for warehousing and distribution, credit card processing, accounting
and benefits administration. General and administrative expenses increased
during 1998 primarily due to hiring additional personnel and related costs to
support increased sales such as credit card processing and distribution costs.
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Stock Option Compensation Expense. As discussed above, uBid will incur a
total compensation charge of $13.3 million in connection with options uBid
granted prior to its initial public offering. This amount will be amortized over
the vesting periods of the outstanding options. uBid recognized $5.3 million of
this charge to compensation in December 1998.
Income Taxes. uBid had a net loss since its inception in 1997 and expects
to incur losses for the foreseeable future. No benefit for income taxes was
provided in 1997 or 1998 due to the uncertainty of realization of these benefits
in future years.
Net Loss. Based on the foregoing information, uBid had a net loss of
approximately $313,000 and $10.2 million for the period from its inception to
December 31, 1997 and for the year ended December 31, 1998, respectively. In the
year ended December 31, 1998 the loss from operations before the non-cash stock
option compensation expense was $4.7 million, and the stock option compensation
expense totaled $5.3 million.
Liquidity and Capital Resources
Prior to uBid's December 1998 IPO, uBid financed its operations with
advances from Creative and cash flow from operations. The net proceeds from
uBid's IPO were $23.8 million and in September 1999, uBid completed a follow-on
offering of 2,300,000 shares of its common stock which yielded net proceeds of
$48.1 million.
Net cash used in operating activities was $16.5 million for the year ended
December 31, 1999 and approximately $108,000 for the year ended December
31,1998. During the year ended December 31, 1999, the net decrease in cash from
operating activities was due to a net loss from operations of $25.5 million
after the non-cash compensation charge of $3.5 million, a $7.8 million increase
in inventory, a $3.0 million increase in accounts receivable, and a $2.2 million
increase in prepaid expenses and other assets. This decrease was partially
offset by an $11.0 million increase in accounts payable, a $3.8 million increase
in accrued marketing, a $3.1 million increase in accrued freight, and a $3.2
million increase in accrued expenses and other current liabilities.
Net cash used in investing activities was approximately $6.6 million for
the year ended December 31, 1999 and approximately $347,000 for the year ended
December 31, 1998. During the year ended December 31, 1999, the increase in cash
used in investing activities was due to approximately $4.5 million in purchases
of warehousing and office equipment and investments in software development and
systems related to uBid's auction platform. In addition, uBid's restricted cash
increased by $2.1 million due to collateral invested in certificates of deposit
which are used as security for uBid's office lease and certain purchases from
suppliers.
Net cash provided by financing activities was approximately $48.6 million
for the year ended December 31, 1999 and $26.5 million for the year ended
December 31, 1998. During the year ended December 31, 1999, cash flow from
financing activities primarily consisted of proceeds from uBid's follow-on
public offering of 2,300,000 shares of common stock from which uBid received
$48.1 million, net of underwriting commissions and discounts.
uBid anticipates that it will have negative cash flows from operations for
the foreseeable future. Creative advanced cash to uBid for its operations until
the consummation of its IPO. Upon consummation of uBid's IPO, those advances
were converted into a note payable to Creative. The outstanding balance on the
note bears interest at the prime rate and will be repaid on or before June 4,
2000. For the year ended December 31, 1999, interest income of $1.5 million
earned on the proceeds of uBid's public offerings was partially offset by
interest expense of approximately $270,000 on the note payable to Creative. Net
proceeds from uBid's public offerings are being used for working capital needs,
including advertising and brand development for growth, as well as development
of uBid's infrastructure. Through December 31, 1999, uBid incurred expenses
related to establishing uBid as an independent company of approximately $400,000
and uBid has spent a total of approximately $1.8 million in capital expenditures
to fully establish itself as an independent company. These expenditures included
warehouse and distribution equipment, hardware and software for computer systems
and furniture and fixtures. uBid funded the purchase and leasing of this
equipment with working capital. In August 1999, uBid completed the transition to
locate its primary website servers in the Chicago area. Most of uBid's back
office systems operations are provided through agreements with Creative.
Although uBid anticipates continuing to use its current back office
administrative systems in Torrance for
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the near term, uBid intends to implement its own hardware and software systems,
by the end of the second quarter of 2000, at an estimated cost of approximately
$1 million. In addition, uBid plans to install new database management software,
purchase new enterprise software and upgrade its existing systems over the next
12 months at a total estimated cost of approximately $3.3 million. uBid expects
to fund the purchase of this equipment with working capital.
uBid expects to use a substantial amount of its working capital for sales
and marketing expenditures to increase its customer base, and expects sales and
marketing expenses to increase significantly both in absolute dollars and as a
percentage of revenues. There can be no assurance this will result in levels of
increased revenues that justify such expenditures.
uBid intends to retain any earnings for the foreseeable future for use in
the operation and expansion of its business. Consequently, uBid does not
anticipate paying any cash dividends on its common stock to its stockholders for
the foreseeable future. In addition, it is probable that any debt financing
agreements uBid may enter into will contain restrictions on its ability to
declare dividends.
uBid believes that the net proceeds from its IPO and its recent follow-on
offering will satisfy its working capital and capital expenditure requirements
for at least the next twelve months. However, there can be no assurance uBid
will not require additional funds prior to the expiration of such period. If
uBid's capital requirements vary materially from those currently planned, uBid
could require additional financing sooner than anticipated. There can be no
assurance that any such financing will be available on acceptable terms, if at
all, or that such financing will not be dilutive to uBid's stockholders.
uBid's ability to raise equity capital within the next two years may be
limited as a result of statutory and contractual restrictions relating to the
spin-off. For a discussion of these restrictions and the risks they present, see
the investment consideration captioned "uBid is subject to restrictions on its
ability to issue equity securities, which may limit its ability to grow its
business and compete effectively."
Year 2000
Computer systems, software packages, and microprocessor dependent equipment
may cease to function or generate erroneous data during the year 2000. The
problem could affect those systems or products that are programmed to accept a
two-digit code in date code fields. To correctly identify the year 2000, a four-
digit date code field is required to be what is commonly termed "year 2000
compliant."
uBid may realize exposure and risk if the systems for which it is dependent
upon to conduct day-to-day operations are not year 2000 compliant. The potential
areas of exposure include electronic data exchange systems operated by third
parties with whom uBid transacts business, certain products purchased from third
parties for resale, and computers, software, telephone systems and other
equipment used internally. To minimize the potential adverse affects of the year
2000 problem, uBid established an internal project team comprised of all
functional disciplines. This project team identified internal systems (both
information technology and non-information technology systems) that were not
year 2000 compliant, determined their significance in the effective operation of
uBid, and developed plans to resolve the issues where necessary. uBid
communicated with the suppliers and others with whom it does business to
coordinate year 2000 readiness. The responses received by uBid indicated that
steps were being undertaken to address this concern. However, if such third
parties are not able to make all systems year 2000 compliant, there could be a
material adverse impact on uBid.
uBid's principal transaction processing software through which nearly all
of uBid's business is transacted appears to be year 2000 compliant and, as such,
uBid does not anticipate any material adverse operational issues to arise. uBid
implemented corrective solutions before the end of the third quarter of 1999.
The costs incurred by uBid with respect to this project were approximately
$500,000, all of which was recorded as an expense in the year incurred. uBid
does not expect to make significant expenditures in the future relating to the
year 2000 issue.
uBid believes its auction software to be year 2000 compliant and full
compliance of the auction software was verified by an external consultant in
1999. uBid currently runs various third party applications that required year
2000 updates. These were implemented prior to the end of 1999. Although uBid has
not experienced any material
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year 2000 problems or disruptions since January 1, 2000, there can be no
assurance that such problems or disruptions will not occur in the future.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
uBid's financial instruments include cash and government securities on
repurchase agreements at fixed rates. At December 31, 2000, the carrying values
of the uBid's financial instruments approximated their fair values based on
current market prices and rates. uBid has not entered into any derivative
financial instruments. uBid does not have any foreign currency exposure because
it does not transact business in foreign currencies.
Item 8. Financial Statements and Supplementary Data
uBid's consolidated financial statements are filed under this Item,
beginning on page F-1 of this Report. The financial statement schedules
required under Regulation S-X are filed pursuant Item 14, beginning on page F-18
of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
uBid's executive officers, key employees and directors, their ages and
their positions as of March 1, 2000 were as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Gregory K. Jones................................ 39 Chairman, President and Chief Executive Officer
Thomas E. Werner................................ 42 Vice President and Chief Financial Officer
Timothy E. Takesue.............................. 31 Vice President--Merchandising
Kenneth Dotson.................................. 39 Chief Marketing Officer
Joel D. Ludvigsen............................... 33 Vice President--International
D. Paul Stolarski............................... 48 Vice President--Engineering
Jason M. MacLean................................ 31 Vice President--Customer Care
Allen U. Lenzmeier............................. 56 Director
Howard A. Tullman............................... 54 Director
Russell Pillar.................................. 34 Director
Norman H. Wesley................................ 50 Director
Mark C. Layton.................................. 40 Director
</TABLE>
Gregory K. Jones has been President and Chief Executive Officer of uBid
since November 1997, and Chairman of the Board since July 1998. From October
1995 to November 1997, Mr. Jones was Senior Vice President of Strategic Markets
at APAC TeleServices, Inc., a provider of outsourced telephone-based marketing,
sales and customer management solutions. From October 1990 to October 1995, Mr.
Jones served as the President and Chief Operating Officer of The Reliable
Corporation/Office 1, a Chicago-based direct mail/retailer of office products.
From January 1988 to October 1990, Mr. Jones was a Senior Manager, consulting on
systems and technology strategic planning for the accounting/consulting firm of
Ernst & Young LLP. Mr. Jones serves on the
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Board of Directors of Illinois-based Divine Interventures, Inc., a venture
company with investments in several business-to-business Internet start-up
companies. He also serves on the Board of Directors of Ohio-based D.I.Y. Home
Warehouse, an operator of 16 warehouse-format home improvement centers. Mr.
Jones received his B.A. degree from Miami University (Ohio) and his M.M. in
marketing and finance from the J.L. Kellogg Graduate School of Management of
Northwestern University.
Thomas E. Werner has been Vice President and Chief Financial Officer of
uBid since October 1998. From December 1995 to October 1998, Mr. Werner was
Corporate Controller for Gateway, Inc., a manufacturer and marketer of personal
computers and related products. From March 1995 until December 1995, Mr. Werner
was Vice President and Assistant Corporate Controller for Dade International, a
manufacturer of medical diagnostic equipment and products. From 1989 until 1995,
Mr. Werner held various financial management positions with Baxter
International, a manufacturer and distributor of health care products. Mr.
Werner received his B.S. degree in business from Indiana University and is a
Certified Public Accountant.
Kenneth Dotson joined uBid as Chief Marketing Officer in December 1999.
Prior to December 1999, Mr Dotson was Senior Vice President of Marketing and
Business Development of PlanetAll, Inc., an Internet-based contact management
and group calendar service. From December 1994 to August 1998, Mr. Dotson
served as the Vice President of Marketing for Sportsline.com, the publisher of
CBS Sportsline and a network other sports-related web sites and media
properties. He currently serves the Board of Directors of several Internet
companies, including The Email Channel, USFANS, Inc. and Scorecard USA. Mr.
Dotson received a B.S. and a M.B.A. degree in marketing from the University of
Mississippi.
Timothy E. Takesue joined uBid as Vice President--Merchandising in December
1997. Prior to December 1997, Mr. Takesue was Director of
Merchandising/Purchasing for Elek-Tek Inc., a catalog, retail and corporate
reseller. Mr. Takesue was a buyer of computer and computer-related products and
accessories at Montgomery Ward from March 1996 to August 1996 and from February
1988 to March 1996, Mr. Takesue held several positions with Fretter, Inc., a
specialty retailer in appliances, consumer electronics and computers. During his
eight years with that company, Mr. Takesue held the positions of General Store
Manager, District Sales Manager of Indiana, Marketing Manager of the Ohio region
with responsibility for all marketing functions, Regional Marketing Manager for
the New England region, Merchandise Manager with responsibility for all buying
and marketing of computer peripheral, software and accessory products, and
Senior Merchandise Manager with responsibility for all buying and marketing of
computer and related products. Mr. Takesue attended Wayne State University.
Joel D. Ludvigsen joined uBid as Director of Auction Planning in November
1998 and was promoted to Vice President--International in July 1999. From 1996
to 1998, Mr. Ludvigsen served in the Strategic Management Consulting department
at Bain & Company. From 1988 to 1994, Mr. Ludvigsen was a manager in the Audit
Information Technology Group at KPMG Peat Marwick. Mr. Ludvigsen is a Certified
Public Accountant, and received a B.A., summa cum laude, at Luther College and a
M.B.A., with Baker Scholar distinction, at Harvard Graduate School of Business
Administration.
D. Paul Stolarski joined uBid in January 1999 as Vice President--
Engineering. From August 1997 to October 1998, Mr. Stolarski served as Vice
President of Engineering at F5 Networks, a supplier of Internet load balancing
solutions. From August 1996 to August 1997, he served as Section Manager for
Software Development at US Robotics Wireless Data Systems. Prior to that time,
Mr. Stolarski served as product manager for Motorola's Wireless Data Group. Mr.
Stolarski received his M.S. and B.S. degrees in electrical engineering from the
University of Illinois at Champaign-Urbana.
Jason M. MacLean joined uBid in March 1999 as Manager of Customer Retention
and was appointed as Vice President--Customer Care in August 1999. From
September 1996 to March 1999, Mr. MacLean was a senior consultant at Bain &
Company, where he served technology-related clients in both the private equity
and strategic consulting groups. Mr. MacLean received an M.B.A. in finance and
an M.A. in management and international studies from the Wharton School of
Business in 1996, where he was a fellow at the Joseph H. Lauder Institute. Mr.
MacLean received a B.A. in English and Russian from the University of
Pennsylvania.
Mark C. Layton became a member of the Board of Directors of uBid in February
1999. Mr. Layton serves as Chairman of the Board, President and Chief Executive
Officer of PFSweb, Inc., a provider of transaction
35
<PAGE>
management services. 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 also serves as a Director of ISA
International plc ("ISA"), a distributor of computer supplies in Western Europe.
Mr. Layton received a B.S. degree in Business Management Information Technology
from Northern Arizona University.
Allen U. Lenzmeier was appointed to the Board of Directors in June 1999 Mr.
Lenzmeier currently serves as Executive Vice President and Chief Financial
Officer of Best Buy, Inc., an electronics retailer. Mr. Lenzmeier joined Best
Buy in 1984 and has also served as Best Buy's Senior Vice President of Finance
and Operations and Treasurer. Mr. Lenzmeier received a B.A. degree from
Minnesota University and is a Certified Public Accountant.
Russell Pillar became a member of the Board of Directors of uBid in October
1999. Mr. Pillar has served as President and Chief Executive Officer of CBS
Internet Group, a division of CBS Corporation, since January 2000. Prior to
joining CBS, Mr. Pillar was President, Chief Executive Officer, and a member of
the International Board of Directors of Richard Branson's Virgin Entertainment
Group, Inc., a position he held from November 1998 until January 2000. Prior to
joining Virgin, Mr. Pillar was President, Chief Executive Officer, and a
director of Prodigy Internet from September 1997 through August 1998; he had
joined Prodigy's Board of Directors in October 1996 as part of the investor
group that purchased the company from IBM and Sears. From December 1993 through
October 1996 Mr. Pillar held various positions with Precision Systems, Inc., a
publicly traded international telecommunications software provider, serving as
its President, Chief Executive Officer, and as a director. Since October 1991
he also has served as Managing Partner of Critical Mass Ventures LLC, an
Internet-focused technology incubator/venture capital firm. Mr. Pillar serves
on the boards of CBS MarketWatch, CBS SportsLine, Switchboard and a number of
private companies. Mr. Pillar graduated Phi Beta Kappa, cum laude, from Brown
University with an A.B. in East Asian Studies.
Howard A. Tullman joined the Board of Directors in June 1998. Since June
1997, Mr. Tullman has served as the Chief Executive Officer of Tunes.com
(formerly JAMtv Corporation), which operates an Internet music site specializing
in the webcasting of live music events. Mr. Tullman has served as Chairman of
the Board of Tunes.com since February 1999. From October 1996 to May 1997, Mr.
Tullman was one of the co-managers of Digital Entertainment Networks LLC, the
predecessor to JAMtv Corporation. From October 1993 to September 1996, Mr.
Tullman served as the President and Chief Executive Officer of Imagination
Pilots, Inc., a multimedia software developer which he also founded. Immediately
prior to founding Imagination Pilots, Inc., Mr. Tullman served as the Chief
Executive Officer of Eager Enterprises, Inc., an information industry venture
capital firm which he founded in 1990. Mr. Tullman is Chairman of the Board of
Directors of Cobalt Group, Inc., a provider of Internet marketing and data
aggregation services. Mr. Tullman received his B.A. degree from Northwestern
University and a J.D. from the Northwestern University School of Law.
Norman H. Wesley became a member of the Board of Directors of uBid in
November 1998. Beginning January 1, 1999, Mr. Wesley became President, Chief
Operating Officer and a member of the Board of Directors of Fortune Brands,
Inc., a consumer products company with premier brands and leading markets in
home and office products, golf equipment and distilled spirits. Mr. Wesley will
serve as Chief Executive Officer of Fortune Brands beginning January 2000. From
May 1997 to December 1998, Mr. Wesley served as Chairman and Chief Executive
Officer of Fortune Brands Home & Office, the consolidated operation of ACCO
World Corporation and MasterBrands Industries, Inc. Mr. Wesley joined ACCO in
1984 as Vice President, Corporate Development, became President and Chief
Operating Officer of that company in 1987 and Chief Executive Officer in 1990.
From 1997 through December 31, 1998, Mr. Wesley served as Chairman and Chief
Executive Officer of MasterBrands Industries, Inc. Mr. Wesley earned both a B.S.
in finance, cum laude, and a M.B.A., magna cum laude, from the University of
Utah.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires uBid's
officers and directors, and persons who own more than ten percent of a
registered class of uBid's equity securities, to file reports of ownership on
Form
36
<PAGE>
3 and changes in ownership on Forms 4 or 5 with the Securities and Exchange
Commission. These officers, directors and ten percent shareholders are also
required by the Commission's rules to furnish uBid with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
representations from certain reporting persons that no Forms 5 were required for
such persons, uBid believes that during the fiscal year ended December 31, 1999,
all Section 16(a) filing requirements applicable to its officers, directors and
ten percent stockholders were complied with, except as follows: (1) Mr.
Lenzmeier, one of uBid's directors, failed to timely file a Form 3 reporting his
initial statement of beneficial ownership upon his election to the board in June
1999. Mr. Lenzmeier subsequently reported his holdings on a Form 5 report for
the fiscal year ended December 31, 1999. (2) Sam Khulusi, one of uBid's
principal stockholders, filed a late Form 3 reporting his initial statement of
beneficial ownership.
Item 11. Executive Compensation
The following table sets forth for the period from uBid's inception in 1997 to
December 31, 1999 the compensation of Gregory K. Jones, its President and Chief
Executive Officer, and its three other most highly paid officers, whom uBid
refers to as the named executive officers.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Awards
Annual Compensation (1) ---------------------------------
---------------------------------------------------------- Securities All Other
Other Annual Underlying Compensation
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Options (#) ($)(2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Jones................... 1999 $175,000 $100,000 - 200,000 $ 1,342
Chairman, President and Chief 1998 175,000 50,000 - - 1,630
Executive Officer 1997 19,519 - - 366,494 -
Thomas E. Werner (3)............... 1999 160,000 50,000 - 20,000 90,195
Vice President, Chief Financial 1998 6,153 - - 109,948 -
Officer and Secretary
Timothy E. Takesue................. 1999 125,276 50,000 - - 909
Vice President--Merchandising 1998 79,077 20,000 - 45,325 886
1997 16,076 20,000 - 54,974 -
Joel D. Ludvigsen (3).............. 1999 71,454 30,000 - 10,000 627
Vice President--International 1998 9,231 - - 32,984 -
</TABLE>
(1) 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.
(2) Consists of Company 401(k) Plan matching contributions on behalf of the
named executive officer and reimbursements related to moving expenses.
(3) Messrs. Werner and Ludvigsen joined uBid in 1998.
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<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth the individual grants of stock options made
by uBid during the fiscal year ended December 31, 1999 to each of the named
executive officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------------------
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of Stock
Securities Granted to Price Appreciation for
Underlying Employees Exercise Option Term (5)
Options in Last Price Expiration -----------------------
Granted (#) Fiscal Year (4) ($/sh) Date 5% 10%
--------------------------------------------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Name
Gregory K. Jones...... 200,000 (1) 9.2% $36.63 11/15/09 $4,607,282 $11,675,757
Thomas E. Werner...... 20,000 (2) 0.9 19.38 8/17/09 243,760 617,735
Joel D. Ludvigsen..... 10,000 (3) 0.5 31.81 6/8/09 200,051 506,969
</TABLE>
(1) These options vest as to 6.25% on the first quarterly anniversary of the
date of grant and 6.25% each quarterly anniversary thereafter until the
options are fully vested on the fourth year anniversary of the date of
grant. Upon a merger, sale of substantially all of the assets or similar
transaction involving uBid that results in a change of control, the option
will become fully vested. See "Employment Agreements and Change-in-Control
Arrangements."
(2) These options vest as to 25% on the first anniversary of the date of grant
and 25% annually thereafter until the options are fully vested on the
fourth anniversary of the date of grant. Upon a merger, sale of
substantially all of the assets or similar transaction involving uBid that
results in a change of control, the options will become fully vested. See
"Employment Agreements and Change-in-Control Arrangements."
(3) These options vest as to 25% on the first anniversary of the date of grant
and 25% annually thereafter until the options are fully vested on the
fourth anniversary of the date of grant. Upon a merger, sale of
substantially all of the assets or similar transaction involving uBid that
results in a change of control, the next 25% installment of the option will
vest, called the Accelerated Installment, along with a prorated amount of
any additional number of unvested shares covered by the option calculated
by (x) subtracting the number of full months remaining until the normal
annual vesting date of the Accelerated Installment from 12, (y) dividing
the difference by 12 and (z) multiplying the resulting fraction times the
number of shares covered by the next 25% installment. See "Employment
Agreements and Change-in-Control Arrangements."
(4) Based on an aggregate of 2,170,730 options granted to uBid's directors and
employees in fiscal year 1999, including the named executive officers.
(5) 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.
38
<PAGE>
Year-End Option Values
The following table sets forth information concerning the value of
unexercised options at December 31, 1999. No options were exercised by the
named executive officers in the 1999 fiscal year.
YEAR-END OPTION VALUES
Fiscal Year 1999
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1999 December 31, 1999 (1)
-------------------------------- --------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gregory K. Jones................. 146,598 419,896 $3,845,266 $5,767,872
Thomas E. Werner................. 21,990 107,958 387,684 1,693,200
Timothy E. Takesue............... 31,055 69,244 735,031 1,498,102
Joel D. Ludvigsen................ 6,597 36,387 97,042 388,153
</TABLE>
(1) The value of in-the-money options is based on the closing price of uBid's
Common Stock as reported on the Nasdaq National Market on December 31,
1999, which was $26.50 per share, less the aggregate exercise price, times
the aggregate number of shares issuable pursuant to such options.
Compensation of Directors
Our directors did not receive cash compensation for serving on uBid's board
of directors or its committees for the fiscal year ended December 31, 1999, but
they were reimbursed for expenses incurred in attending board meetings. Other
than option grants and the reimbursement of reasonable expenses incurred with
attending board and committee meetings, uBid has not yet adopted specific
policies on directors' compensation and benefits.
In 1998, Mr. Tullman and Mr. Wesley were each granted an option to purchase
18,325 shares of uBid common stock, at a per share exercise price of $6.82 and
$11.79, respectively, in connection with their becoming directors of uBid. In
connection with his appointment as a director in February 1999, Mr.Layton was
granted an option to purchase 18,325 shares of uBid common stock at an exercise
price of $62.50 per share. Mr. Lenzmeier received options to purchase 18,325
shares of uBid common stock at the time of his board appointment in June 1999 at
an exercise price of $27.88 per share. Mr. Pillar received options to purchase
18,325 shares of uBid common stock at the time of his board appointment in
October 1999 at an exercise price of $36.88 per share. In October 1999, each
non-employee director was granted an option to purchase 12,000 shares of uBid
common stock at an exercise price of $38.00. Stock option grants made to uBid's
directors in 1998 were made under uBid's informal stock option plan, and option
grants made to directors in 1999 were made under the uBid 1998 Stock Incentive
Plan.
Employment Agreements and Change-in-Control Arrangements
uBid entered into an employment agreement dated December 20, 1999, as
amended, with Gregory K. Jones, president and chief executive officer of uBid.
Pursuant to this agreement, Mr. Jones receives an annual base salary in the
amount of $250,000, 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 a pre-established annual
bonus, at a target amount of his then-current salary, based on the attainment of
objectives mutually agreed to by Mr. Jones and the uBid board of directors. In
the event his employment is terminated by uBid without cause or by him for good
reason at any time prior to the first anniversary of the consummation of the
merger with CMGI, Mr.
39
<PAGE>
Jones is entitled to six months severance pay, continued benefits coverage
through the six month anniversary of the termination, outplacement services not
to exceed $10,000, and the bonus that would have been paid at the later of the
six month anniversary of his termination or the end of the fiscal year. This
bonus will be the higher of his previous year's bonus, the target bonus for the
year in which the termination occurs, or the actual bonus attained for the
fiscal year in which such termination occurs.
Pursuant to his original employment agreement in 1997, Mr. Jones was
granted an option to purchase 366,494 shares of uBid common stock at an exercise
price of $0.27 per share. In 1999, Mr. Jones was granted an option to purchase
200,000 shares of uBid common stock at an exercise price of $36.63 per share.
Pursuant to his employment agreement with uBid, upon a merger, sale of
substantially all of the assets or similar transaction involving uBid that
results in a change of control (including the merger with CMGI), Mr. Jones'
options will become fully vested; however, Mr. Jones has agreed with uBid and
CMGI to amend the employment agreement to provide that, upon consummation of the
merger, all unvested options issued to Mr. Jones prior to the effective time of
the merger will vest only as to the next annual or next four quarterly
installments (as applicable), together with prorated additional vesting with
respect to the number of months that have elapsed since the last annual or
quarterly installment.
uBid has also entered into an employment agreement with Kenneth Dotson,
vice president of marketing, dated November 30, 1999. The agreement with Mr.
Dotson is terminable by either party at any time. Pursuant to this agreement,
Mr. Dotson receives base salary in the amount of $3,173 per week in accordance
with uBid payroll practices. If Mr. Dotson's employment agreement is terminated
without cause, he will receive an amount equal to three months of his base
compensation as severance and his options that would have vested in that year
will accelerate if he is terminated. Pursuant to his employment agreement, in
1999 Mr. Dotson was granted an option to purchase 180,000 shares of uBid common
stock at an exercise price of $37.00 per share. Upon a merger, sale of
substantially all of the assets or similar transaction involving uBid that
results in a change of control, Mr. Dotson's option will become fully vested.
Thomas Werner, vice president and chief financial officer of uBid, has the
right to receive three months' salary if his employment is terminated by uBid
without cause. Upon a change of control of uBid, all outstanding options held by
Mr. Werner will become fully vested.
In addition, Timothy E. Takesue, vice president merchandising of uBid, has
the right to receive three months' salary if his employment is terminated by
uBid without cause at any time prior to the first anniversary of the
consummation of the merger. Pursuant to an agreement with uBid, upon a merger,
sale of substantially all of the assets or similar transaction involving uBid
that results in a change of control, Mr. Takesue's options will become fully
vested; however, Mr. Takesue has agreed with uBid and CMGI to amend the
agreement to provide that, upon consummation of the merger, all unvested options
issued to Mr. Takesue prior to the effective time of the merger will vest only
as to the next annual or next four quarterly installment (as applicable),
together with prorated additional vesting with respect to the number of months
that have elapsed since the last annual or quarterly installment.
Compensation Committee Interlocks and Insider Participation
Since its establishment in December 1998, the Compensation Committee has
consisted of Messrs. Tullman and Wesley, neither of whom is or has been an
officer or employee of uBid. Prior to the establishment of the Compensation
Committee, the Board of Directors set the compensation of uBid's officers.
Mr. Jones, who has served as uBid's President and Chief Executive Officer
since November 1997, has participated in the board's deliberations concerning
the compensation of officers other than himself. Frank Khulusi, who served as a
member of the Board of Directors until November 1999 and who participated in
board deliberations concerning compensation of officers prior to the
establishment of the Compensation Committee, serves as Chief Executive Officer
of Creative Computers, with which uBid has engaged in several transactions which
are described under the caption "Certain Relationships and Related Transactions"
below.
40
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information concerning the beneficial
ownership of common stock of uBid as of March 1, 2000 for the following:
. each person or entity who is known by uBid to own beneficially more
than 5% of the outstanding shares of uBid's common stock;
. each of uBid's current directors;
. each of the named executive officers; and
. all directors and executive officers of uBid as a group.
Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
held by that person that are currently exercisable or exercisable within 60 days
of March 1, 2000 are deemed outstanding. Percentage of beneficial ownership is
based upon 11,587,056 shares of common stock outstanding at March 1, 2000. To
uBid's knowledge, except as set forth in the footnotes to this table and subject
to applicable community property laws, each person named in the table has sole
voting and investment power with respect to the shares set forth opposite such
person's name. Except as otherwise indicated, the address of each of the persons
in this table is as follows: c/o uBid, Inc. 8550 West Bryn Mawr, Suite 200,
Chicago, Illinois 60631.
<TABLE>
<CAPTION>
Shares Beneficially Owned
------------------------------------------
Name of Beneficial Owner Number Percentage
- ------------------------ ----------------- --------------------
<S> <C> <C>
5% Stockholders:
Sam U. Khulusi (1) 1,350,966 11.7%
Frank F. Khulusi (2) 1,306,121 11.3%
Directors and Named Executive Officers:
Gregory K. Jones (3) 159,098 1.4%
Thomas E. Werner (4) 21,990 *
Timothy E. Takesue (5) 34,720 *
Joel D. Ludvigsen (6) 6,597 *
Allen U. Lenzmeier (7) 1,500 *
Mark C. Layton (8) 6,082 *
Russell I. Pillar (9) 1,500 *
Howard A. Tullman (10) 5,165 *
Norman H. Wesley (11) 9,165 *
All current executive officers and directors as a group (12 persons) (12) 260,817 2.3%
</TABLE>
- --------
* Less than 1% of the outstanding common stock.
(1) Sam Khulusi's address is 2459 208th Street, Suite 200, Torrance, California
90501. Includes options to purchase approximately 9,163 shares of uBid
common stock that are presently vested or will vest within 60 days of March
1, 2000.
(2) Frank Khulusi's address is 2555 West 190th Street, Torrance, California
90505. Includes options to purchase approximately 58,740 shares of uBid
common stock that are presently vested or will vest within 60 days of March
1, 2000 and 6,044 shares held in trust for the benefit of the children of
Basimah Khulusi.
41
<PAGE>
(3) Includes options to purchase approximately 159,098 shares of uBid common
stock that are presently vested or will vest within 60 days of March 1,
2000.
(4) Includes options to purchase approximately 21,990 shares of uBid common
stock that are presently vested or will vest within 60 days of March 1,
2000.
(5) Includes options to purchase approximately 34,720 shares of uBid common
stock that are presently vested or will vest within 60 days of March 1,
2000.
(6) Includes options to purchase approximately 6,597 shares of uBid common
stock that are presently vested or will vest within 60 days of March 1,
2000.
(7) Includes options to purchase approximately 1,500 shares of uBid common
stock that are presently vested or will vest within 60 days of March 1,
2000.
(8) Includes options to purchase approximately 6,082 shares of uBid common
stock that are presently vested or will vest within 60 days of March 1,
2000.
(9) Includes options to purchase approximately 1,500 shares of uBid common
stock that are presently vested or will vest within 60 days of March 1,
2000.
(10) Includes options to purchase approximately 5,165 shares of uBid common
stock that are presently vested or will vest within 60 days of March 1,
2000.
(11) Includes options to purchase approximately 5,165 shares of uBid common
stock that are presently vested or will vest within 60 days of March 1,
2000.
(12) Includes an aggregate of 256,817 shares of uBid common stock issuable upon
exercise of stock options which are presently vested or will vest within 60
days of March 1, 2000.
Item 13. Certain Relationships and Related Transactions
In February 1999, uBid 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 uBid's bylaws, as well as certain additional procedural
protections. These indemnity agreements provide generally that uBid will advance
expenses incurred by directors and executive officers in any action or
proceeding as to which they may be indemnified, and require uBid to indemnify
these individuals to the fullest extent permitted by law.
Relationship with Creative Computers
Prior to uBid's initial public offering, uBid was a wholly-owned, indirect
subsidiary of Creative. As a wholly-owned subsidiary of Creative Computers, uBid
received various services provided by Creative, including administration
(accounting, human resources, legal) (through June 1999), warehousing and
distribution (through June 1998), Internet/telecom and joint marketing (through
September 1999). Creative also provided uBid with the services of a number of
its executives and employees. In consideration for these services, Creative
historically allocated a portion of its overhead costs related to such services
to uBid. uBid believes that the amounts allocated to uBid by Creative were no
less favorable than the expenses it would have incurred to obtain such services
on its own or from unaffiliated third parties. None of these services were
provided to uBid by Creative pursuant to any written agreement.
Frank Khulusi, the owner of approximately 11% of uBid's common stock and a
former director, is the chief executive officer and a director of Creative. His
brother, Sam Khulusi, who owns approximately 12% of uBid's common stock, is a
director of Creative.
42
<PAGE>
Separation from Creative
In June 1999, Creative distributed to its stockholders all of the 7,329,883
shares of uBid common stock owned by Creative, which constituted approximately
80.1% of uBid outstanding common stock. Prior to the spin-off, uBid entered into
several agreements with Creative providing for the separation of the two
companies and the distribution of Creative's uBid common stock to its
stockholders, the provision by Creative of certain interim services to uBid,
employee benefit arrangements and tax and other matters. These agreements,
referred to as the "Ancillary Agreements," are discussed below.
Separation and Distribution Agreement
The Separation and Distribution Agreement uBid entered into with Creative
sets forth certain agreements among uBid and Creative, with respect to the
principal corporate transactions required to effect the spin-off and certain
other agreements governing the relationship among the parties thereafter.
The Distribution. Under the Separation and Distribution Agreement, uBid and
Creative agreed that neither would take, or permit any of its respective
affiliates to take, any action which reasonably could be expected to prevent the
distribution from qualifying as a tax-free distribution to Creative and its
stockholders pursuant to Section 355 of the Internal Revenue Code. Accordingly,
uBid agreed not to issue or grant, directly or indirectly, any shares of uBid
capital stock or any rights, warrants, options or other securities to purchase
or acquire any shares of uBid capital stock that would affect the tax-free
nature of the distribution.
Registration Rights. The Separation and Distribution Agreement provides
that Frank and Sam Khulusi will have the right in certain circumstances, but in
no event prior to 180 days after the distribution, to require uBid to register
for resale shares of uBid common stock held by them under the Securities Act,
subject to certain conditions, limitations and exceptions. uBid also has agreed
with Frank and Sam Khulusi that if it files a registration statement for the
sale of securities under the Securities Act, then they may, subject to certain
conditions, limitations and exceptions, include in that registration statement
shares of uBid common stock held by them. In addition, for an additional 90 days
after this 180-day period, uBid will be entitled to include uBid shares in any
requested demand registration and to reduce the number of shares to be sold by
Frank and Sam Khulusi thereunder to a minimum of 20%, collectively, of the total
offering plus the amount of any underwriters' over-allotment option. uBid also
agreed to bear up to $100,000 of the cost of the first, and up to $50,000 of the
second, requested registrations and will bear the cost of all piggyback
registrations.
Releases and Indemnification. uBid has agreed to indemnify, defend and hold
harmless Creative and each of Creative's directors, officers and employees from
and against all liabilities relating to, arising out of or resulting from: (1)
the failure of uBid or any other person to pay, perform or otherwise promptly
discharge any liabilities of uBid in accordance with their respective terms; (2)
any breach by uBid of the Separation and Distribution Agreement or any of the
other agreements described below; and (3) material misstatements or omissions
with respect to all information contained in the prospectus or the registration
statement used in connection with uBid's initial public offering.
Except as provided in the Separation and Distribution Agreement, Creative
has agreed to indemnify, defend and hold harmless uBid and each of its
directors, officers and employees from and against all liabilities relating to,
arising out of or resulting from the failure of Creative or any other person to
pay, perform or otherwise promptly discharge any liabilities of Creative other
than the liabilities of uBid, and any breach by Creative of the Separation and
Distribution Agreement or any of the agreements described below. Neither uBid
nor Creative is obligated under the Separation and Distribution Agreement to
indemnify the other for: (1) any liability, contingent or otherwise, assumed,
transferred, assigned or allocated to the other under the Separation and
Distribution Agreement or any of the agreements discussed below; (2) any
liability for the sale, lease, construction or receipt of goods, property or
services purchased, obtained or used in the ordinary course of business between
the parties prior to December 9, 1998; (3) any liability for unpaid amounts for
products or services or refunds owing on products or services due on a value-
received basis for work done by one party at the request or on behalf of the
other; (4) any liability that uBid or Creative may have with respect to
indemnification or contribution pursuant to the Separation and Distribution
Agreement for claims brought against other party by third persons; or (5)
generally, any liability the release of which
43
<PAGE>
would result in the release of any person other than a person released pursuant
to the Separation and Distribution Agreement. The Separation and Distribution
Agreement also contains provisions that govern, except as otherwise provided in
any of the agreements discussed below, the resolution of disputes, controversies
or claims that may arise between or among the parties. These provisions
contemplate that efforts will be made to resolve disputes, controversies and
claims by escalation of the matter to senior management (or other mutually
agreed) representatives of the parties. If such efforts are not successful, any
party may submit the dispute, controversy or claim to mandatory, binding
arbitration, subject to the provisions of the Separation and Distribution
Agreement. The Separation and Distribution Agreement contains procedures for the
selection of a sole arbitrator of the dispute, controversy or claim and for the
conduct of the arbitration hearing, including certain limitations on discovery
rights of the parties. These procedures are intended to produce an expeditious
resolution of any such dispute, controversy or claim.
In the event that any dispute, controversy or claim is, or is reasonably
likely to be, in excess of $5 million, or in the event that an arbitration award
in excess of $5 million is issued in any arbitration proceeding commenced under
the Separation and Distribution Agreement, subject to certain conditions, any
party may submit such dispute, controversy or claim to a court of competent
jurisdiction and the arbitration provisions contained in the Separation and
Distribution Agreement will not apply. In the event that the parties do not
agree that the amount in controversy is in excess of $5 million, the Separation
and Distribution Agreement provides for arbitration of such disagreement.
Noncompetition; Certain Business Transactions. The Separation and
Distribution Agreement provides that, for a period of nine months after the date
of the spin-off, Creative would 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 uBid on the date of
the Separation and Distribution Agreement, referred to herein as Company
Business. Except as otherwise contemplated under the Ancillary Agreements, uBid
anticipates that all future contracts between uBid and Creative will be at arm's
length.
Expenses. Except as expressly set forth in the Separation and Distribution
Agreement or in any Ancillary Agreement, each party agreed to bear its own
respective third-party fees, costs and expenses paid or incurred in connection
with the spin-off.
Creative Stock Option Adjustments. Options to purchase common stock of
Creative that were outstanding as of the date of the spin-off were adjusted to
become options to purchase shares of both Creative common stock and uBid common
stock. In connection with the spin-off, uBid issued options to purchase 520,473
shares of uBid common stock to holders of these Creative options. The number of
shares of uBid common stock that was covered by these options was based upon the
ratio of the number of shares of uBid common stock distributed to Creative's
stockholders in the spin-off, divided by the total number of shares of Creative
common stock outstanding on the record date for the spin-off. In addition, the
exercise price for each adjusted option was allocated between the option to
purchase Creative common stock and the option to purchase uBid common stock
based on the respective pre- and post-distribution prices of Creative common
stock and uBid common stock on the Nasdaq National Market to preserve the
intrinsic value and ratio of exercise to market price of the options both before
and after the spin-off. uBid issued these adjustment options under uBid's 1998
Stock Incentive Plan.
Services Agreement
In December 1998, uBid entered into a Services Agreement with Creative,
under which Creative provided to uBid various administrative services, including
general accounting services, credit services and payroll and benefits
administration.
At the time of the spin-off, uBid mutually terminated the Services
Agreement and Creative no longer performs the transactional and administrative
services covered by the agreement. Since that time, uBid has engaged third
parties to perform some of these services and has had these services performed
internally by its personnel. uBid 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 its business; however,
because uBid historically relied heavily on Creative for these services, it
could experience interruptions or temporary delays in its operations and its
ability to process customer transactions and ship products on a timely basis.
44
<PAGE>
Tax Indemnification and Allocation Agreement
Prior to the spin-off, uBid entered into a Tax Indemnification and
Allocation Agreement with Creative, which provides that if any one of certain
events occurs, and such event causes the distribution not to be a tax-free
transaction to Creative under Section 355 of the Internal Revenue Code, uBid
will indemnify Creative for income taxes Creative may incur by reason of the
distribution not so qualifying. These events include any breach of
representations relating to its activities and ownership of uBid capital stock
made to Creative or in connection with obtaining an IRS revenue ruling or tax
opinion relating to the spin-off. In connection with the distribution, uBid made
various representations regarding its intentions at the time of the distribution
with respect to its business. The Tax Indemnification and Allocation Agreement
also provides that Creative will indemnify uBid for taxes for which uBid has no
liability to Creative under the circumstances described above. Regardless of the
indemnification provisions of such agreement, Creative and uBid will each be
severally liable to the Internal Revenue Service for the full amount of any such
federal corporate level tax that is not paid by the other.
At the time of the spin-off, Creative received an opinion from
PricewaterhouseCoopers LLP to the effect that for federal income tax purposes
the spin-off will qualify as a tax-free spin-off under Section 355 and that no
gain or loss will be recognized by Creative or by holders of Creative common
stock upon the spin-off.
If the spin-off did not qualify as tax-free as a result of Section 355(e),
then Creative would recognize capital gain equal to the excess of (x) the fair
market value of the shares of uBid common stock Creative distributed to its
stockholders over (y) its adjusted tax basis in uBid common stock.
In addition to the foregoing indemnities, the Tax Indemnification and
Allocation Agreement provides for: (1) the allocation and payment of taxes for
periods during which uBid and Creative are included in the same consolidated
group for federal income tax purposes or the same consolidated, combined or
unitary returns for state tax purposes; (2) the allocation of responsibility for
the filing of tax returns; (3) the conduct of tax audits and the handling of tax
controversies; and (4) various related matters.
For periods during which uBid was included in Creative's consolidated
federal income tax returns or state consolidated, combined, or unitary tax
returns (which will include the periods on or before the date of the spin-off),
uBid was required to pay an amount of income tax equal to the amount uBid 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. uBid is responsible for its own separate tax
liabilities that are not determined on a consolidated or combined basis. uBid
will also be responsible in the future for any increases to the consolidated tax
liability of uBid and Creative that is attributable to uBid, and will be
entitled to refunds for reductions of tax liabilities attributable to uBid for
prior periods.
As noted above, uBid has agreed to indemnify Creative for any tax liability
suffered by Creative arising out of actions by uBid after the distribution that
would cause the distribution to lose its qualification as a tax-free
distribution or to be taxable to Creative for federal income tax purposes under
Section 355 of the Internal Revenue Code. To ensure that issuances of equity
securities by uBid will not cause the distribution to be taxable to Creative,
uBid agreed to certain restrictions on its ability to issue and repurchase its
equity securities until three years following the distribution date. Until the
second anniversary of the distribution date, uBid cannot issue its common stock
or other equity securities, including the shares sold in its initial public
offering and any other stock offerings, that would cause the number of shares of
its common stock distributed by Creative in the distribution to constitute less
than 60% of the outstanding shares of its common stock unless uBid first obtains
either the consent of Creative or a favorable IRS letter ruling that the
issuance will not affect the tax-free status of the distribution. After this
period until the end of the third year from the distribution date, uBid cannot
issue its common stock and other equity securities that, when combined with
equity securities sold in and after its initial public offering, would cause the
number of shares of its common stock distributed by Creative in the distribution
to constitute less than 55% of the outstanding shares of its common stock unless
uBid first obtains the consent of Creative or a favorable IRS letter ruling or
opinion of tax counsel that the issuance would not affect the tax-free status of
the distribution. These restrictions on the issuance of equity securities may
severely limit its ability to raise necessary capital or to complete
acquisitions of other companies using its equity securities. The same
requirements for an IRS letter ruling or consent of Creative are generally
applicable to any proposed repurchases of its common stock during these
restricted periods. The foregoing restrictions do not apply to uBid's issuance
of debt securities that are not convertible into
45
<PAGE>
uBid common stock or other equity securities. See the investment consideration
entitled "uBid is subject to restrictions on its ability to issue equity
securities, which may limit its ability to grow its business and compete
effectively."
In connection with the merger agreement, uBid, CMGI and Creative
Computers entered into an amendment to the tax indemnification agreement which
amendment will become effective only upon the closing of the merger with CMGI.
The amendment:
. deletes from the tax allocation agreement all provisions that would
prohibit uBid from undertaking the merger;
. provides that neither the negotiation of the merger nor the
consummation thereof constitutes a breach of uBid's obligations under
the agreement;
. provides that CMGI agrees to unconditionally guarantee any
indemnification obligation that uBid may have under the tax
indemnification agreement;
. provides that if a party to the amendment becomes aware of any
proceeding, such as a tax audit or tax controversy, that could give
rise to an obligation under the tax allocation agreement, such party
must give notice to all other parties to the amendment; and
. provides that in the event of such a proceeding, both the party
subject to the proceeding and any party who may have an
indemnification obligation with respect to such proceeding shall
jointly control the proceeding.
Joint Marketing Agreement
uBid and Creative have entered into a joint marketing agreement pursuant
to which uBid has agreed to continue certain joint marketing efforts that were
in place prior to uBid's initial public offering. The Marketing Agreement
provides that uBid will continue to be presented on the home page of Creative's
"PC Mall" Website on at least one quarter of the page as well as receive a
banner advertisement on the home page of Creative's "PC Mall" Website. The
Marketing Agreement provides that uBid will provide to Creative a button that
"clicks through" from the home page of uBid's Website to Creative's "PC Mall"
Website. As consideration for these marketing services, uBid will either make a
payment of $10,000 per month to Creative or Creative, in its sole discretion,
may elect to receive a banner advertisement on each page of uBid's Website
instead of the monthly payment. The Marketing Agreement expired in December
1999.
Internet/Telecommunications Agreement
uBid and Creative have also entered into an Internet/telecommunications
agreement pursuant to which Creative will continue to provide uBid with certain
Internet and telecommunications services, including hosting uBid's Website. uBid
agreed to reimburse Creative for all telecommunications charges (other than
personnel charges), as well as pay additional monthly personnel charges on a
cost-plus 10% basis and capital equipment charges based on standard lease rates.
The Internet/Telecommunications Agreement expired in December 1999. In
connection with the agreement, uBid purchased capital equipment from Creative at
a depreciated book value of approximately $100,000.
Sublease Agreement
Until July 1998, uBid was dependent on Creative for warehousing and
distribution services. In July 1998, uBid became responsible for its own
warehousing and distribution and entered into a sublease for 100,000 square feet
of Creative's 325,000 square foot distribution center in Memphis, Tennessee. In
October 1999, uBid entered into a sublease which provides for the continued use
of Creative's inventory control and shipping systems during the term of the
sublease. The sublease is at a monthly rate equal to Creative's obligation to
the landlord, plus taxes and
46
<PAGE>
utilities, and will expire in 2002. In December 1999, uBid subleased an
additional 70,000 square feet at Creative's distribution center in Memphis that
expires in 2002.
Other Relationships with Creative
Creative Credit Agreement. Creative is party to a credit agreement pursuant
to which it has a credit facility of up to $60 million. Under the credit
agreement, each of Creative's subsidiaries is required to guarantee Creative's
obligations and to grant the lender a security interest in its assets to secure
the obligations under the guaranty. Prior to the spin-off, the lender released
uBid's guaranty obligations under the Credit Agreement.
Payable to Creative. From uBid's inception in April 1997 until its initial
public offering, Creative provided funds to finance its operations in the form
of advances that bear interest at the prime rate. uBid had amounts due to
Creative for working capital and fixed asset purchases totaling approximately
$4.6 million as of December 31, 1998, of which $3.3 million is represented by a
note due in June 2000 with interest payable monthly, and the remaining $1.3
million of which was repaid during the first quarter of 1999.
Stockholder Agreement
As an inducement to CMGI to enter into the merger agreement, Frank and Sam
Khulusi, who beneficially owned as of February 9, 2000 an aggregate of 2,589,184
shares of uBid common stock, entered into a stockholder agreement with CMGI and
uBid, dated as of February 9, 2000, agreeing to vote their shares in favor of
the merger agreement and the merger and against specified alternative
transactions. These stockholders retain the right to vote their shares on all
other matters.
These stockholders also appointed CMGI, or any nominee of CMGI, as their
lawful attorney and proxy with the limited right to vote each of the 2,589,184
shares of uBid common stock at every uBid stockholders meeting and every written
consent in lieu of such meeting, in favor of approval of the merger and the
merger agreement. The stockholder agreement terminates upon the earlier of the
merger becoming effective in accordance with the terms and provisions of the
merger agreement and the termination of the merger agreement.
47
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
<TABLE>
<S> <C> <C>
(a)(1) Financial Statements and Report of Ernst & Young LLP, Independent Auditors Page
----
Report of Independent Auditors F-2
Financial Statements:
Balance Sheets as of December 31, 1998 and 1999. F-3
Statements of Operations for the Period April 1, 1997 (Inception) to December 31, 1997
and the Years Ended December 31, 1998 and 1999. F-4
Statements of Cash Flows for the period April 1, 1997 (Inception) to December 31, 1997
and the Years Ended December 31, 1998 and 1999. F-5
Statements of Changes in Stockholders' Equity (Deficit) for the Period April 1, 1997
(Inception) to December 31, 1997 and the Years Ended December 31, 1998 and 1999. F-6
Notes to Financial Statements F-7
(a)(2) Schedule II -- Valuation and Qualifying Accounts F-17
(b) Reports on Form 8-K
No reports on Form 8-K were filed by uBid during the period covered by this Report.
(c) Exhibits
The Exhibit Index attached hereto is incorporated into this Item 14(c) by reference.
</TABLE>
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
uBID, INC.
Dated: March 29, 2000 By: /s/ Gregory K. Jones
--------------------
Gregory K. Jones
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the date indicated.
Signature Title Date
--------- ----- ----
/s/ Gregory K. Jones Chairman of the Board, March 29, 2000
-------------------- President and Chief
Gregory K. Jones Executive Officer
(Principal Executive Officer)
/s/ Thomas E. Werner Vice President and Chief March 29, 2000
-------------------- Financial Officer (Principal
Thomas E. Werner Financial and Accounting Officer)
/s/ Russell I. Pillar Director March 29, 2000
---------------------
Russell I. Pillar
/s/ Howard A. Tullman Director March 29, 2000
---------------------
Howard A. Tullman
/s/ Norman H. Wesley Director March 29, 2000
--------------------
Norman H. Wesley
/s/ Mark C. Layton Director March 29, 2000
------------------
Mark C. Layton
/s/ Allen U. Lenzmeier Director March 29, 2000
----------------------
Allen U. Lenzmeier
49
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<C> <S>
2.1 Agreement and Plan of Merger and Reorganization, dated as of February 9, 2000, by and among
CMGI, Senlix Corporation and uBid, Inc. (7)
3.1 Restated Certificate of Incorporation of uBid (1)
3.2 Amended and Restated By-Laws of uBid (1)
4.1 Form of uBid's Common Stock Certificate (1)
4.2 [intentionally omitted]
4.3 Registration Rights Agreement by and between uBid and Frank Khulusi and Sam Khulusi, dated as
of December 7, 1998 (1)
10.1 Separation and Distribution Agreement by and between uBid and Creative dated as of December 7,
1998, as amended (2)
10.2 Services Agreement by and between uBid and Creative, dated as of December 7, 1998 (1)
10.3(a) Tax Indemnification and Allocation Agreement by and between uBid and Creative, dated as of
December 7, 1998, as amended (3)
10.3(b) Amendment No. 1 to the Tax Indemnification and Allocation Agreement by and between uBid,
Creative and CMGI, Inc., dated as of February 9, 2000
10.4 Joint Marketing Agreement by and between uBid and Creative, dated as of December 7, 1998 (1)
10.5 Internet/Telecommunications Agreement by and between uBid and Creative, dated as of December 7,
1998 (1)
10.6 Employment Agreement, dated December 20, 1999, as amended, between uBid and Gregory K. Jones*
10.7 uBid, Inc. 1998 Stock Incentive Plan*
10.8 Sublease Agreement between uBid and Creative, dated as of July 1, 1998 (1)
10.9 [intentionally omitted]
10.10 Agreement Restricting Transfer of Assets and Letter Agreement dated as of September 23, 1998 by
and between Deutsche Financial Services Corporation and Creative and uBid (1)
10.11 Letter Agreement dated November 30, 1998 by and between Creative and Paul Colton (1)
10.12 Letter Agreement dated September 9, 1998 by and between Creative and David Matthews (1)
10.13 Assignment and License Agreement by and between uBid and Creative, dated as of November 30,
1998 (1)
10.14 Form of Indemnification Agreement, entered into as of February 12, 1999, between uBid and each
of its directors and executive officers (3)
10.15(a)+ Program License and Professional Services Agreement, dated as of June 14, 1999, by and between
uBid, Inc. and LibertyOne Limited (4)
10.15(b) Amendment No. 1 to Program License and Professional Services Agreement, dated as of October 27,
1999, by and between uBid, Inc. and LibertyOne Limited
</TABLE>
50
<PAGE>
<TABLE>
<S> <C>
10.16+ Office Lease between 8550 Bryn Mawr, LLC and uBid, Inc. (5)
10.17 Letter Agreement, dated as of August 16, 1999, between Thomas E. Werner and uBid, Inc.* (6)
10.18 Letter Agreement, dated as of August 17, 1999, between Timothy E. Takesue and uBid, Inc.* (6)
10.19 Letter Agreement, dated November 30, 1999, between Kenneth Dotson and uBid, Inc.*
10.20 Amendment to Option Agreements, each dated as of February 9, 2000, between uBid and each of
Gregory K. Jones, Jason Maclean, Paul Stolarski, Joel Ludvigsen and Timothy E. Takesue *
10.21 Sublease Agreement, dated as of December 1, 1999, by and between uBid and Creative.
23 Consent of Ernst & Young LLP
27 Financial Data Schedule (for Commission use only)
</TABLE>
- ------------------------
* The referenced exhibit is a compensatory contract, plan or arrangement.
+ Confidential treatment has been requested for portions of this agreement
pursuant to an application for confidential treatment sent to the
Securities and Exchange Commission. Such portions have been redacted and
marked with an asterisk. The non-redacted version of this document has been
sent to the Securities and Exchange Commission.
(1) Incorporated by reference to uBid's Registration Statement on Form S-1 (No.
333-58477), on file with the Securities and Exchange Commission.
(2) Incorporated by reference to the Report of Form 8-K of Creative Computers,
Inc. dated May 27, 1999, filed on May 18, 1999 with the Securities and
Exchange Commission.
(3) Incorporated by reference to uBid's Annual Report on Form 10-K for the year
ended December 31, 1998, on file with the Securities and Exchange
Commission.
(4) Incorporated by reference to uBid's Report on Form 10-Q for the period
ended June 30, 1999, on file with the Securities and Exchange Commission.
(5) Incorporated by reference to uBid's Registration Statement on Form S-1 (No.
333-83319), on file with the Securities and Exchange Commission.
(6) Incorporated by reference to uBid's Report on Form 10-Q for the period
ended September 30, 1999, on file with the Securities and Exchange
Commission.
(7) Incorporated by reference to Annex A of the Proxy Statement/Prospectus,
filed as part of the Registration Statement on Form S-4 of CMGI, Inc. (File
No. 333-32158) on March 10, 2000 with the Securities and Exchange
Commission.
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors............................................ F-2
Balance Sheets as of December 31, 1998 and December 31, 1999.............. F-3
Statements of Operations for the Period April 1, 1997 (Inception) to
December 31, 1997 and the Years Ended December 31, 1998 and 1999.......... F-4
Statements of Cash Flows for the Period April 1, 1997 (Inception) to
December 31, 1997 and the Years Ended December 31, 1998 and 1999.......... F-5
Statements of Changes in Stockholders' Equity (Deficit) for the Period
April 1, 1997 (Inception) to December 31, 1997 and the Years Ended
December 31, 1998 and 1999................................................ F-6
Notes to Financial Statements............................................. F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
uBid, Inc.
We have audited the accompanying balance sheets of uBid, Inc. as of December
31, 1998 and 1999, and the related statements of operations, cash flows and
changes in stockholders' equity for the period from April 1, 1997 (Inception) to
December 31, 1997 and the years ended December 31, 1998 and 1999. Our audits
also included the financial statement schedule listed in the index at item
14(a). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of uBid, Inc. at December 31,
1998 and 1999, and the results of its operations and its cash flows for the
period from April 1, 1997 (Inception) to December 31, 1997 and the years ended
December 31, 1998 and 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
financial information set forth therein.
/s/ Ernst & Young LLP
Chicago, Illinois
January 17, 2000, except for Note 9, as to which
the date is February 9, 2000
F-2
<PAGE>
uBid, Inc.
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 26,053 $ 51,544
Restricted cash.......................................... -- 2,092
Accounts receivable, net of allowances of $20 and $113,
respectively............................................ 623 3,615
Merchandise inventories.................................. 7,235 15,098
Prepaid expenses and other assets........................ 195 2,374
-------- --------
Total current assets................................... 34,106 74,723
Fixed assets, net.......................................... 519 4,543
-------- --------
Total assets........................................... $ 34,625 $ 79,266
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to Creative................................. $ -- $ 3,331
Accounts payable......................................... 9,013 19,995
Accrued marketing........................................ 948 4,753
Accrued freight.......................................... 444 3,508
Accrued expenses and other current liabilities........... 2,256 2,417
-------- --------
Total current liabilities.............................. 12,661 34,004
Note payable to Creative................................... 3,331 --
Stockholders' equity :
Preferred Stock; $.001 par value; 5,000,000 shares
authorized; no shares
issued or outstanding................................... -- --
Common Stock; $.001 par value; 20,000,000 shares
authorized;
11,543,842 and 9,146,883 shares issued and outstanding
as of
December 31, 1999 and December 31, 1998, respectively... 2 4
Additional paid-in-capital................................. 37,138 85,752
Deferred stock option compensation expense................. (8,025) (4,517)
Accumulated deficit........................................ (10,482) (35,977)
-------- --------
Total stockholders' equity............................. 18,633 45,262
-------- --------
Total liabilities and stockholders' equity............. $ 34,625 $ 79,266
======== ========
</TABLE>
See notes to the financial statements
F-3
<PAGE>
uBid, Inc.
STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
Period from
April 1, 1997 Years Ended
(Inception) to December 31,
December 31, ----------------------
1997 1998 1999
-------------- ---------- ----------
<S> <C> <C> <C>
Net revenues........................... $ 9 $ 48,232 $ 204,925
Cost of revenues....................... 8 44,257 185,798
---------- ---------- ----------
Gross profit........................... 1 3,975 19,127
Operating expenses:
Sales and marketing.................. 10 2,829 22,154
Technology and development........... 66 1,022 4,092
General and administrative........... 212 4,856 16,073
Stock based compensation............. -- 5,267 3,508
---------- ---------- ----------
Total operating expenses........... 288 13,974 45,827
---------- ---------- ----------
Loss from operations................... (287) (9,999) (26,700)
Interest income........................ -- 74 1,475
Interest expense....................... (26) (244) (270)
---------- ---------- ----------
Net loss............................... $ (313) $ (10,169) $ (25,495)
========== ========== ==========
Basic and diluted net loss per share... $ (0.04) $ (1.36) $ (2.61)
========== ========== ==========
Shares used to compute basic and
diluted net loss per share............ 7,329,883 7,461,061 9,765,366
</TABLE>
See notes to the financial statements
F-4
<PAGE>
uBid, Inc.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from
April 1, 1997 Years Ended
(Inception) to December 31,
December 31, ------------------
1997 1998 1999
-------------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $(313) $(10,169) $(25,495)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 4 155 473
Non cash stock option expense........... -- 5,267 3,508
Changes in operating assets and
liabilities:
Accounts receivable, net.............. (9) (614) (2,992)
Merchandise inventories, net.......... (2) (7,233) (7,863)
Prepaid expenses and other assets..... (20) (175) (2,179)
Accounts payable...................... -- 9,013 10,982
Accrued marketing..................... -- 948 3,805
Accrued freight....................... -- 444 3,064
Accrued expenses and other current
liabilities -- 2,256 161
----- -------- --------
Net cash used in operating activities....... (340) (108) (16,536)
Cash flows from investing activities:
Increase in restricted cash............... -- -- (2,092)
Purchases of property and equipment....... (331) (347) (4,497)
----- -------- --------
Net cash used in investing activities....... (331) (347) (6,589)
Cash flows from financing activities:
Issuance of common stock to Creative...... 1 -- --
Advances from Creative.................... 670 (670) --
Note payable to Creative.................. -- 3,331 --
Proceeds from public offerings of common
stock and exercises of stock options..... -- 23,847 48,616
----- -------- --------
Net cash provided by financing activities... 671 26,508 48,616
----- -------- --------
Net change in cash and cash equivalents..... -- 26,053 25,491
Cash and cash equivalents at beginning of
period..................................... -- -- 26,053
----- -------- --------
Cash and cash equivalents at end of period.. $ -- $ 26,053 $ 51,544
===== ======== ========
Supplemental cash flow disclosures:
Cash paid during the year for:
Interest................................ -- 248 244
</TABLE>
See notes to the financial statements
F-5
<PAGE>
uBid, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common stock Additional
------------- paid-in Deferred Accumulated
Shares Amount capital Compensation deficit Total
------ ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to Creative ........... 7,330 $ 1 $ -- $ -- $ -- $ 1
Net loss for the
period................. -- -- -- -- (313) (313)
------ ---- ------- ------- -------- --------
Balance at December 31,
1997................... 7,330 $ 1 $ -- $ -- $ (313) $ (312)
Issuance of common stock
in IPO................. 1,817 1 23,846 -- -- 23,847
Stock based
compensation........... -- -- 13,292 (13,292) -- --
Amortization of deferred
stock option
compensation .......... -- -- -- 5,267 -- 5,267
Net loss for the year... -- -- -- -- (10,169) (10,169)
------ ---- ------- ------- -------- --------
Balance at December 31,
1998................... 9,147 $ 2 $37,138 $(8,025) $(10,482) $ 18,633
Issuance of common stock
in public offering..... 2,300 2 48,109 -- -- 48,111
Issuance of common stock
upon exercise of stock
options, net of
repurchases............ 97 -- 505 -- -- 505
Amortization of deferred
stock option
compensation .......... -- -- -- 3,508 -- 3,508
Net loss for the year... -- -- -- -- (25,495) (25,495)
------ ---- ------- ------- -------- --------
Balance at December 31,
1999................... 11,544 $ 4 $85,752 $(4,517) $(35,977) $ 45,262
====== ==== ======= ======= ======== ========
</TABLE>
See notes to the financial statements.
F-6
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. Description of Company and Summary of Significant Accounting Policies
Description of Company
The Company is engaged in the retail sale of merchandise, including new,
close-out, and refurbished products, utilizing an interactive online auction.
The Company currently specializes in selling primarily brand name computers,
consumer electronics, housewares, jewelry, and sporting goods and memorabilia
over the World Wide Web to consumers and small and medium-sized businesses.
The Company was established by Creative Computers ("Creative") in April 1997
and was incorporated in Delaware in September 1997 as a wholly-owned, indirect
subsidiary of Creative. Beginning on April 1, 1997 ("Inception"), prior to the
formation of the Company, Creative began funding certain startup and
development costs related to the Company's business. On September 19, 1997,
assets and liabilities related to the Company were recorded by the Company at
Creative's basis. The financial statements have been prepared as if the Company
operated as a stand-alone entity since Inception.
Cash Equivalents
All highly liquid debt instruments purchased with a maturity of three months
or less are considered cash equivalents.
Restricted Cash
The Company maintains restricted collateral invested in certificates of
deposits, which mature within one year, and are used as security for the
Company's office lease and certain purchases from suppliers. The classification
is determined based on the expected term of the collateral requirement and not
necessarily the maturity date of the underlying securities.
Revenue Recognition
The Company sells merchandise purchased from suppliers under two types of
arrangements. The Company either purchases merchandise for inventory or
purchases merchandise at the time of sale under consignment-type revenue
sharing agreements. For the years ended December 31, 1998 and 1999, the
Company's sales of merchandise purchased for inventory comprised approximately
96% and 88% of product revenues, respectively, with merchandise purchased under
consignment-type revenue sharing agreements representing approximately 4% and
12% of product revenues, respectively.
The Company recognizes revenue for advertising placed on its Website during
the period in which the advertisement is displayed, provided that no
significant Company obligations remain at the end of the period and collection
of the resulting receivable is probable. The Company recognizes software
licensing revenue when all the criteria of American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue
Recognition, are met. The Company recognizes revenue from payments for
professional services as the related services are performed. The Company
derives revenue from premium and exclusive placements of vendors in their
related category on the Company's Website and records this revenue on a
straight-line basis over the term of the related vendor contract. Commissions
and fees from the sale of equipment and merchandise through the Company's co-
branded business-to-business Websites are recognized on the date the related
auction is concluded.
F-7
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
Sales -- merchandise held in inventory
For sales of merchandise owned and warehoused by the Company, the Company is
responsible for conducting the auction, billing the customer, shipping the
merchandise to the customer, processing merchandise returns and collecting
accounts receivable. The Company recognizes the gross sales amount as revenue
upon verification of the credit card transaction authorization and shipment of
the merchandise. In instances where the credit card authorization has been
received but the merchandise has not yet been shipped, the Company defers
revenue recognition until the merchandise is shipped. The Company had no
deferred revenue related to sales of purchased inventory as of December 31,
1998 or 1999.
Sales -- merchandise purchased at time of sale under revenue sharing
agreements
For sales of merchandise under revenue sharing agreements, the Company
either takes physical possession of the merchandise or the supplier retains
physical possession of the merchandise. In either case, the Company is not
obligated to take title to the merchandise nor does it take title unless it
successfully sells the merchandise at auction. Upon completion of an auction,
the Company purchases the inventory, takes title to the merchandise, charges
the customer's credit card and either ships the merchandise directly or
arranges for a third party to complete delivery to the customer. The Company
records the gross sales amount as revenue upon verification of the credit card
authorization and shipment of the merchandise. In instances where credit card
authorization has been received but the merchandise has not been shipped, the
Company defers revenue recognition until the merchandise is shipped. The
Company had no deferred revenue related to sales from revenue sharing
agreements as of December 31, 1998 or 1999.
Merchandise return policy
The Company's return policy is that merchandise sold by the Company is sold
on an "as is" basis and is not returnable. However, the Company, although not
obligated to do so, may accept merchandise returns if a product is defective or
does not conform to the specifications of the item sold at auction, and
attempts to work with its customers to resolve complaints about merchandise.
The Company provides for allowances for estimated future returns at the time of
shipment based on historical experience.
Merchandise Inventory
The Company accounts for merchandise inventory under the first-in first-out
method. Inventory is carried at lower of cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on the estimated useful lives of the assets
which range from three to five years. Leasehold improvements are stated at cost
and depreciation is computed using the straight-line method over the shorter of
the useful life of the asset or the term of the lease.
Accounting for the Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain intangible assets for
impairment when events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. In the event the sum of the expected
undiscounted future cash flows resulting from the use of the asset is less than
the carrying amount of the asset, an impairment loss equal to the excess of the
asset's carrying value over its fair value is recorded. The Company has
recognized no such losses.
F-8
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
Software Development Costs
Internal and external costs incurred to develop internal-use computer
software are expensed during the preliminary project stage and capitalized
during the application development stage and amortized over three years. During
the period ended December 31, 1997 and the years ended December 31, 1998 and
1999, $39, $0, and $124 was expensed, respectively. As of December 31, 1998 and
December 31, 1999, capitalized software net of accumulated amortization was
$176 and $1,391, respectively.
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising expense
was $0, $2,669 and $21,193 for the period ended December 31, 1997 and years
ended December 31, 1998 and 1999, respectively.
The Company has marketing relationships with a number of online companies
including AOL, MSN/LinkExchange, PC World Online, LookSmart and Prodigy
pursuant to which it receives portal positioning, anchor tenancy, promotional
placements, sponsorships and/or banner advertisements for a monthly fee.
Generally, these agreements have terms up to three years, do not provide for
guaranteed renewal and may be terminated by the Company without cause. There
were no payments made under these agreements for 1997. The Company's payments
to these online companies for years ended December 31, 1998 and 1999 were
approximately $433 and $4,077, respectively.
Income Taxes
Deferred income taxes are recognized by applying enacted statutory tax rates
applicable to future years to differences between the tax bases and financial
reporting amounts of existing assets and liabilities. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
The operations of the Company are included in the consolidated tax return of
Creative for the period prior to the spin-off (see Note 3). The tax provision
presented in these financial statements for that period was determined as if
the Company had filed a separate return.
Accounting for Stock Option Compensation
The Company accounts for stock options as prescribed by APB Opinion No. 25
and includes pro forma information in the Stock options footnote, as permitted
by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation.
Net Loss per Share
Basic net loss per share excludes dilution and is computed by dividing net
loss by the weighted average number of common shares outstanding during the
reported periods. Diluted net loss per share reflects the potential dilution
that could occur if stock options and other commitments to issue common stock
were exercised. During the period ended December 31, 1997, and the years ended
December 31, 1998 and 1999, options to purchase 458,118, 1,107,278 and
2,887,775 common shares, respectively, were anti-dilutive and have been
excluded from the weighted average share computation.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of accounts receivable from individuals
and merchants located in the United States. Sales are generally made
F-9
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
through credit cards and are pre-approved. The Company maintains an allowance
for doubtful accounts receivable based upon the expected collectibility of
accounts receivable and potential credit losses. Such losses have been
immaterial.
Concentration of Supplier
The Company is dependent upon suppliers to provide it with merchandise for
sale through the Company's Internet auctions. For the period from Inception to
December 31, 1997 one supplier, Creative, accounted for approximately 100% of
net revenues from related product sales. For the years ended December 31, 1998
and December 31, 1999, no individual supplier accounted for greater than 10% of
net revenues from related product sales.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires that fair values be disclosed for
most of the Company's financial instruments. The carrying amounts of the
Company's financial instruments, which include cash, accounts receivable, note
payable, and current liabilities are considered to be representative of their
respective fair values.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
respective reporting periods. Actual results could differ from those estimates.
Comprehensive Loss
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", which requires the Company to display
comprehensive income (loss) and its components as part of the financial
statements. The Company has no components of other comprehensive loss, and, as
a result, the comprehensive loss is the same as the net loss for all periods
presented.
Stock Splits
On June 25, 1998, the Company effected a 100,000-for-1 split of its Common
Stock. On November 30, 1998, the Company effected a .7329883-for-1 reverse
split of its common stock. All common shares and per share data have been
retroactively adjusted to reflect these stock splits.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133,
which will be effective for the Company for the fiscal year and quarters
beginning after June 15, 2000, requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and
F-10
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
measure those instruments at fair value. The Company does not expect the
potential effect of adopting the provisions of SFAS No. 133 to have a
significant impact on its financial position, results of operations, and cash
flows.
Non-monetary Transaction
In August 1999, the Company reached an agreement with ICON International,
Inc. to acquire media trade credits for online and offline advertising in
exchange for approximately $2,500 of the Company's inventory. The Company
recorded the trade credits at the net realizable value of the inventory. The
Company recorded no gain or loss related to this transaction. The unused trade
credits will expire in August 2004.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
----- ------
<S> <C> <C>
Computer, machinery and equipment.......................... $ 372 $2,363
Computer software.......................................... 306 1,471
Furniture and fixtures..................................... -- 741
Leasehold improvements..................................... -- 600
----- ------
678 5,175
Less accumulated depreciation and amortization............. (159) (632)
----- ------
$ 519 $4,543
===== ======
</TABLE>
3. Related Party Transactions
From Inception to the Company's initial public offering (IPO), Creative
provided advances to the Company for working capital and fixed asset purchases
of $670 and $3,331 through December 31, 1997 and December 31, 1998,
respectively. Upon consummation of the Company's IPO (see Note 6), the $3,331
was converted to a note payable to Creative. The outstanding balance on the
note bears interest at the prime rate and will be repaid in June 2000. Interest
expense on these advances and notes payable was $26, $244, and $270 for the
period ended December 31, 1997 and the years ended December 31, 1998 and 1999,
respectively. In addition, from the date of the IPO until December 31, 1998,
Creative advanced the Company an additional $1,277 in short-term non-interest
bearing advances. The advances related to cash disbursements made by Creative
on behalf of the Company during the transition period while the Company
established its own cash management programs. These advances were settled on at
least a monthly basis. During the transition period, the Company continued to
participate in Creative's cash management process through May 1999. In
connection therewith, cash receipts related to the Company's business were
applied directly to reduce the advances from Creative.
F-11
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
In addition, Creative provided various services to the Company such as
administration (accounting, human resources, legal) through June 7, 1999,
warehousing and distribution through June 1998, and Internet/telecom and joint
marketing through September 1999. In consideration for those services, Creative
historically allocated a portion of its overhead costs related to such services
to the Company. The charges for these services were:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------
Period from
April 1, 1997
(Inception) to
December 31,
1997 1998 1999
-------------- ------ ------
<S> <C> <C> <C>
Administrative.............................. $ 36 $ 481 $ 479
Warehousing and distribution................ -- 550 549
Internet/telecom and joint marketing........ 172 773 548
---- ------ ------
$208 $1,804 $1,576
==== ====== ======
</TABLE>
Administration costs for services provided by Creative to the Company were
determined by identifying all of Creative's personnel who supported the
Company. Their pay, based on the number of hours of service provided, benefits,
plus an allocation of overhead, was used to calculate these costs. Credit card
processing costs for transactions above a certain dollar amount were based on
$1.50 per order. Prior to June 30, 1998, warehousing and distribution was
charged at $4.00 per order and was based on Creative's fully burdened cost per
order for warehousing and distribution. Effective July 1, 1998 the Company
began subleasing 50,000 square feet of warehouse space from Creative at its
marginal cost. In October 1998, the sublease was increased to 100,000 square
feet on the same terms. In December 1999, the Company entered into an
additional sublease with Creative for 70,000 square feet. The Company is also
charged a pro-rata share, based on square footage, of the warehouse utilities,
property taxes, and other warehouse costs. Direct labor to operate the
warehouse was charged directly to the Company. Internet/telecom service costs
included an allocation of monthly depreciation for all hardware and software
based on usage by the Company, as well as monthly rates for telecommunication
expenses consumed by the Company. Management asserts that the methods to
identify and allocate costs to the Company for these services provided by
Creative were reasonable.
The Company and Creative entered into on or prior to the consummation of the
IPO, certain agreements governing various interim and ongoing relationships
between the Company and Creative after the completion of the IPO and
Distribution. The terms of such agreements generally provide for services to be
rendered by Creative similar to those described above. The costs of general
accounting services, payroll and benefits administration, and
internet/telecommunications were charged based on Creative's cost plus 10%.
Credit services are charged at $1.50 per transaction. Effective July 1, 1998,
the Company began subleasing a portion of Creative's distribution facility.
Pursuant to the Sublease Agreements, future minimum lease payments to Creative
are $288, $288 and $96 in the years 2000, 2001 and 2002, respectively. The
agreement pursuant to which Creative provides the Company with general
accounting, payroll and benefits administration, and
internet/telecommunications services was terminated upon completion of the
Separation and the Distribution.
On June 7, 1999, Creative distributed to its shareholders its remaining
equity interest in the Company consisting of 7,329,883 shares of Common Stock.
In connection with the spin-off, options to purchase common stock of Creative
that were outstanding as of the date of the spin-off were adjusted to become
options to purchase shares of both Creative's common stock and the Company's
Common Stock. The Company issued options to purchase 520,473 shares of Common
Stock to holders of these Creative options. The number of options to purchase
Common Stock was based on the ratio of the number of shares of Company Common
F-12
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
Stock distributed to Creative shareholders in the spin-off to the number of
shares of Creative common stock outstanding on the record date for the spin-
off. The exercise price for each adjusted option was allocated between the
option to purchase Creative Common Stock and the option to purchase Company
Common Stock based on the respective pre- and post-distribution prices of
Creative's common stock and the Company's Common Stock. Such options were
issued under the Company's 1998 Stock Incentive Plan.
4. Income Taxes
No tax benefit has been provided for pretax losses due to the uncertainty of
realization of these benefits in future years. This is the primary reason the
amount of income tax benefit recorded is less than the amount of income tax
benefit calculated using the U.S. federal statutory rate of 35% for the period
ended December 31, 1997 and for the years ended December 31, 1998 and 1999.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Deferred tax assets:
Start-up and development costs....................... $ 84 $ 63
Net operating loss carryforwards..................... 1,990 10,814
Stock option compensation............................ 2,107 3,510
Other................................................ 12 45
------- --------
4,193 14,432
Valuation allowance................................ (4,193) (14,432)
------- --------
$ -- $ --
======= ========
</TABLE>
The Company has recorded a 100% valuation allowance equal to the net
deferred tax asset balance based upon management's determination that the
recognition criteria for realization have not been met.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $27,000 which may be used to offset future taxable income. The net
operating loss carryforwards expire beginning in 2012, if not used. Should
certain changes in the Company's ownership occur, there could be a limitation on
the utilization of its net operating losses.
5. Employee Benefits
401(k) Savings Plan
In July 1999, the Company established a 401(k) Savings Plan which covers
substantially all Company full-time employees. Participants may make tax-
deferred contributions of up to 15% of annual compensation (subject to other
limitations specified by the Internal Revenue Code). Through June 1999, the
Company's employees were participants in the 401(k) Plan of Creative. The
related administrative and matching costs, which were charged to the Company by
Creative, were not significant for the period from Inception to December 31,
1997 and for the year ended December 31, 1998. For the year ended December 31,
1999, the cost charged by Creative was $5. Administrative and matching costs
under the Company's independent plan for the year ended December 31, 1999 were
$25.
F-13
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
Employee Stock Option Plans
The Company granted non-qualified options to purchase Common Stock to
certain employees and directors of the Company. The terms of the options
provide for vesting, over a 4 or 5-year period, except for options to purchase
183,247 shares of Common Stock at December 31, 1999 which vested as to the
first 20% of the shares covered by such options upon completion of the
Company's IPO. The options expire 10 years from the date of grant.
In August 1998, the Company's Board of Directors adopted the 1998 Stock
Incentive Plan (the "1998 Plan") and reserved 1,832,470 shares of common stock
for issuance thereunder. The 1998 Plan allows an annual increase of 3% of the
outstanding shares of Common Stock as of December 31, 1999 under an annual
"evergreen" share increase provision. Based on this provision, an additional
346,315 shares of common stock will be made available for issuance in 2000. The
1998 Plan authorized the award of options, stock appreciation rights,
restricted stock awards and performance based stock awards (each an "Award").
The maximum number of shares with respect to options and stock appreciation
rights granted to any employee in any fiscal year is 476,442 shares. Options
granted under the 1998 Plan may be either incentive stock options ("ISOs") or
non-qualified stock options ("NSOs"). ISOs may be granted only to employees
(including officers and directors who are also employees). Awards other than
ISOs may be granted to employees, directors and consultants, as defined.
Options under the 1998 Plan may be granted for periods up to 10 years and at
prices no less than 85% of the fair value of the shares on the date of grant
provided, however, that the exercise price of an ISO may not be less than 100%
of the fair market value of the shares on the date of grant and the exercise
price of an ISO granted to a 10% shareholder may not be less than 110% of the
fair market value of the shares on the date of grant.
There are 1,789,587 outstanding options to purchase common shares that have
been granted under the 1998 Plan through December 31, 1999 and 42,883 shares
are available for grant under the 1998 Plan at December 31, 1999.
The following table summarizes all stock option activity:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number Price
--------- --------
<S> <C> <C>
Granted............................................... 458,118 $ 0.27
Canceled.............................................. -- --
Exercised............................................. -- --
---------
Outstanding at December 31, 1997.................... 458,118 $ 0.27
Granted............................................... 651,725 $ 4.62
Canceled.............................................. (2,565) 0.27
Exercised............................................. -- --
---------
Outstanding at December 31, 1998.................... 1,107,278 $ 2.79
Granted............................................... 2,170,730 $32.39
Canceled.............................................. (282,701) 31.41
Exercised............................................. (107,532) 4.73
---------
Outstanding at December 31, 1999.................... 2,887,775 $22.55
=========
</TABLE>
F-14
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
The following table summarizes information about options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Average
Remaining Weighted
Contractual -Average
Range of Exercise Options Life Exercise Options
Prices Outstanding (In Yrs) Price Exercisable
----------------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C>
$ 0.270--$ 5.999 761,309 7.76 $ 0.48 254,778
6.000-- 14.999 619,341 8.13 8.53 211,981
15.000-- 59.999 1,216,800 9.65 32.50 13,800
60.000-- 134.063 290,325 9.17 68.61 --
--------- -------
$ 0.270--$134.063 2,887,775 8.78 $22.55 480,559
========= =======
</TABLE>
The options granted by the Company through the date of the IPO were
exercisable only in the event of a successful public offering or sale of the
Company. The Company completed its IPO on December 4, 1998 causing a measurement
date to occur and requiring the Company to compute compensation expense based
upon the difference between the exercise price of the options and the IPO price.
Based upon the difference between the IPO price and the exercise prices of the
1,038,278 options outstanding at December 4, 1998, the Company recorded a
deferred stock option compensation charge of approximately $13,300, which will
be recognized over the vesting period. Approximately $5,300 and $3,500 was
recognized in 1998 and 1999, respectively. The expense relates to options
awarded to employees in all operating expense categories and has not been
separately allocated to these categories.
The fair value of each stock option grant has been estimated pursuant to
SFAS No. 123 on the date of grant using the minimum value method for those
options granted prior to the IPO, and the Black-Scholes option pricing method
for those options issued concurrent with and subsequent to the IPO, with the
following weighted average assumptions:
<TABLE>
<CAPTION>
Minimum Black-
Value Scholes Assumptions
Assumptions -------------------
1998 1998 1999
----------- --------- ---------
<S> <C> <C> <C>
Risk free interest rate......................... 6.3% 4.89% 5.50%
Expected dividend yield......................... None None None
Expected lives.................................. 6 years 6 years 6 years
Expected volatility............................. 0% 142% 120%
</TABLE>
The weighted average grant date fair values of options granted during the
period from Inception to December 31, 1997 and the twelve months ended December
31, 1998 and 1999 were $0.08, $4.03, and $35.82, respectively.
Had the Company accounted for stock options under SFAS No. 123, reported net
loss for the year ended December 31, 1998 and 1999 would have been $10,439 and
$32,173 and net loss per share would have been $1.40 and $3.29, respectively.
The effect of applying SFAS No. 123 on operating results is not likely to be
representative of the effect on operating results for future years.
F-15
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
6. Public Offerings of Common Stock
In December 1998, the Company completed its IPO of 1,817,000 shares common
stock. Based on the initial public offering price of $15.00 per share, the
gross proceeds from the offering were $27,255. After commissions paid to the
underwriters, and other offering costs, the net proceeds were $23,847.
Following the completion of the IPO, Creative owned approximately 80% of the
Company's outstanding Common Stock and as a result, continued to control the
Company. Creative's remaining Equity interest in the Company was distributed to
its shareholders in June 1999 (see Note 3).
In September 1999, the Company completed a follow-on public offering of
2,300,000 shares of Common Stock. Based on the offering price of $22.625 per
share, the gross proceeds from the offering were $52,038. After commissions
paid to the underwriters and other offering costs, the net proceeds were
$48,111.
7. Segment Information
The Company operates in a single reportable segment as an online auction for
computer, consumer electronics and housewares, and sports and recreation
products in the United States. The Company's product revenues accounted for
100% and 98% of total revenues in 1998 and 1999, respectively, and are divided
into two categories; sales of merchandise held in inventory by the Company and
sales of merchandise purchased at the time of sale under consignment-type
revenue sharing agreements with vendors. The Company sources its products from
over 430 vendors and offers, on average, over 6,700 items in each of its daily
auctions. All of the Company's revenues in 1997 were in the computer products
category. Product offerings are divided into the following four categories,
with their corresponding percentage of net product revenues for the years ended
December 31, 1998 and 1999:
<TABLE>
<CAPTION>
Year
Ended
December 31,
---------------
1998 1999
------ ------
<S> <C> <C>
Computer Products--including desktops, portable
computers, computer accessories, disk drives, modems,
monitors/video equipment, components, printers,
scanners, digital cameras, software and home office
products................................................ 83% 74%
Consumer Electronics--including home theater equipment,
home audio equipment, speakers, televisions, camcorders,
VCR's, DVD players, portable audio players and
automobile audio equipment.............................. 11% 19%
Housewares--including kitchen appliances, vacuum
cleaners, personal care devices, furniture, gifts,
photography, jewelry and sunglasses..................... 6% 4%
Sports and Recreation--including sports memorabilia, golf
and tennis, health and fitness, outdoor sports,
bicycles, water sports, and team sports equipment....... -- 3%
</TABLE>
8. Commitments and Contingencies
The Company currently leases office, warehouse facilities and fixed assets
under noncancelable operating leases. Rental expense under operating lease
agreements for 1999 was $486. The Company had no rental expense under lease
agreements in 1997 and 1998.
The Company has marketing relationships with a number of online companies
pursuant to which it receives portal positioning, anchor tenancy, promotional
placements, sponsorships and/or banner advertisements for a monthly fee.
Generally, these agreements have terms up to three years, do not provide for
guaranteed renewal and may be terminated by the Company without cause. The
costs associated with these agreements are recognized over the term of the
related agreements as services are received.
F-16
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
Futures minimum commitments at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Operating Marketing
Leases Agreements
--------- ----------
<S> <C> <C>
Years Ended December 31,
2000............................................... $1,375 $5,122
2001............................................... 1,214 4,000
2002............................................... 901 --
------ ------
Total minimum lease payments..................... $3,490 $9,122
====== ======
</TABLE>
9. Subsequent Event
On February 9, 2000, CMGI, Inc., a Delaware corporation ("CMGI"), agreed to
acquire the Company, as a result of which the stockholders of the Company will
become stockholders of CMGI. Under the terms of the Agreement and Plan of
Merger and Reorganization, CMGI will issue .2628 shares of common stock for
every share of the Company's common stock held on the record date of the
transaction. The merger is subject to customary conditions, including approval
by the Company's stockholders, and if approved is expected to close in May
2000.
F-17
<PAGE>
SCHEDULE II
uBID, INC.
Valuation and Qualifying Accounts
For the Period April 1, 1997 (Inception) to December 31, 1997
and the years ended December 31, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
Balance at Balance
Beginning of Additions Charged at End
Period to Other Deductions of Period
------------ ----------------- ---------- ---------
<S> <C> <C> <C> <C>
Year Ended December 31, 1999:
Allowances for doubtful accounts-trade receivables (1).. $ 20 $ 93 $ -- $ 113
Reserve for excess and obsolete inventory (1)........... 296 752 877 171
Valuation allowance for deferred tax assets............. 4,193 10,239 -- 14,432
Year Ended December 31, 1998:
Allowances for doubtful accounts - trade receivables.... -- 20 -- 20
Reserve for excess and obsolete inventory............... -- 296 -- 296
Valuation allowance for deferred tax assets............. 125 4,068 -- 4,193
Period April 1, 1997 (Inception) to December 31, 1997:
Allowances for doubtful accounts - trade receivables.... -- -- -- --
Reserve for excess and obsolete inventory............... -- -- -- --
Valuation allowance for deferred tax assets............. -- -- -- 125
</TABLE>
- --------------
(1) The balance at the end of the period represents the balance on the balance
sheet for uBid at the end of the 1999 fiscal year.
F-18
<PAGE>
EXHIBIT 10.3(B)
AMENDMENT NO. 1
TO THE
TAX INDEMNIFICATION AND ALLOCATION AGREEMENT
This AMENDMENT NO. 1 TO THE TAX INDEMNIFICATION AND ALLOCATION
AGREEMENT (the "Amendment"), dated as of February 9, 2000, by and between
Creative Computers, Inc., a Delaware corporation ("CCI"), uBid, Inc., a Delaware
corporation ("uBid"), and CMGI, Inc., a Delaware corporation ("CMGI").
RECITALS
A. CCI and uBid have heretofore entered into the TAX INDEMNIFICATION
AND ALLOCATION AGREEMENT dated as of December 7, 1998 (the "Indemnification
Agreement").
B. Contemporaneously herewith, uBid, CMGI and Setec, Inc., a Delaware
corporation and a wholly-owned subsidiary of CMGI, will enter into an Agreement
and Plan of Merger and Reorganization pursuant to which Setec, Inc. will merge
into and with uBid, with uBid the surviving corporation (the "Merger"). As a
result of the Merger, uBid will become a wholly-owned subsidiary of CMGI.
C. uBid and CMGI desire to amend the Indemnification Agreement to
provide certain additional rights to uBid and CCI is willing to agree to such
amendment in consideration of the agreements contained herein.
NOW, THEREFORE, in consideration of the agreements herein contained
and intending to be legally bound hereby, CCI, uBid and CMGI agree as follows:
A. Sections 7.2 and 7.3 of the Indemnification Agreement are deleted
and Section 7.1 of the Indemnification Agreement is amended to read as follows:
7.1 Contest Rights
--------------
(a) Notice. Whenever a party hereto (the "Notified Party")
------
becomes aware of any Proceeding in connection with an Income Tax Liability (or
an issue related thereto) that could result in a redetermination or other
adjustment which could increase its liability or the liability of any member of
the CCI Group or uBid (a "Tax Item") (such Person, hereinafter an "Indemnitee")
for any Tax for which another party hereto (hereinafter the "Indemnitor") is or
may be liable under this Agreement (hereinafter an "Indemnity Issue"), the
Notified Party shall promptly give notice to each other party hereto of such
Indemnity Issue. The failure of any Notified Party to give such notice
1
<PAGE>
shall not relieve the Indemnitor of its obligations under this Agreement except
to the extent such Indemnitor is actually prejudiced by such failure to give
notice.
(b) General Control Rights. Subject to the other provisions of this
-----------------------
Section 7.1, with respect to any Proceeding in respect of an Income Tax Return
relating, in whole or in part, to an Indemnity Issue, the party who has
responsibility for filing such Income Tax Return (the "Responsible Party") shall
have the right to decide as between the parties hereto how such Proceeding is to
be dealt with and finally resolved with the appropriate taxing authority and
shall control all related Proceedings; provided, however, that if the
-------- -------
Responsible Party is not the Indemnitor, the Responsible Party shall:
(i) promptly deliver to the Indemnitor complete copies of all
written notices, requests, or other information received from any taxing
authority or judicial or similar body that relate to any Indemnity Issue;
(ii) not provide any documents or other information to any taxing
authority or judicial or similar body that relate to the Indemnity Issue without
the Indemnitor's prior review;
(iii) not submit any written response or other written work in
respect of any Indemnity Issue to any taxing authority or judicial or similar
body without allowing the Indemnitor to review and revise such written response
or other written work to the extent it relates to any Indemnity Issue (with any
disagreement as to the ultimate language used in any such written response or
other written work to be resolved by the Responsible Party);
(iv) permit the Indemnitor and its representatives, at the
Indemnitor's sole expense, to participate fully in all conferences, meetings,
proceedings or judicial appearances with or before any taxing authority or
judicial or similar body (whether in person or by telephone) the subject matter
of which is or includes the Indemnity Issue;
(v) consult in good faith with the Indemnitor with respect to all
aspects of any action or position to be taken by the Responsible Party that
relates to any Indemnity Issue and take the Indemnitor's interests into account;
(vi) not adopt any position in any Proceeding that unfairly
compromises an Indemnity Issue so as to gain any advantage with respect to any
non-Indemnity Issue which is the subject of the same or any related Proceeding;
(vii) if the Proceeding relates solely to one or more Indemnity
Issues, permit the Indemnitor to control such Proceeding in all respects; and
(viii) except in the circumstances described below, not make any
settlement offer to any taxing authority, discuss any settlement offer made by
any taxing
2
<PAGE>
authority, or accept any settlement offer made by any taxing authority, in each
case with respect to any Proceeding that is related, in whole or in part, to any
Indemnity Issue.
(c) Settlements. With respect to any settlement offer that relates,
------------
in whole or in part, to any Indemnity Issue, the following rules shall apply if
the Responsible Party is not the Indemnitor:
(i) no settlement offer shall be made by the Responsible Party to
any taxing authority except in writing and in such case the amount offered with
respect to any Indemnity Issue shall be determined solely by the Indemnitor (as
indicated in a written notice to the Responsible Party);
(ii) in the case of any settlement offer from a taxing authority
that is not in response to a written settlement offer by the Responsible Party,
the Responsible Party shall, if requested by the Indemnitor, make a written
settlement offer (i.e., a counter offer) to the taxing authority in accordance
----
with paragraph (c)(i); and
(iii) in the case of any settlement offer from a taxing authority
(other than a settlement offer described in paragraph (c)(ii)):
(A) the Responsible Party may make a written settlement
offer (i.e., a counter offer) to the taxing authority in accordance with
paragraph (c)(i);
(B) the Responsible Party may choose not to accept the
settlement offer from the taxing authority and instead choose to litigate the
issues reflected in such settlement offer, in which case the Responsible Party
shall litigate the Indemnity Issue, which litigation shall be conducted subject
to the rules of subsection (b) of this Section 7.1;
(C) the Responsible Party may notify the Indemnitor of the
Responsible Party's proposal that such settlement offer be accepted and entered
into and request the Indemnitor's consent to doing so and, upon (x) the written
consent to such settlement offer by the Indemnitor, (y) a failure of the
Indemnitor to respond to such proposal by the Responsible Party within thirty
days after receipt by the Indemnitor of such notice from the Responsible Party,
or (z) a failure of the Indemnitor to withhold its consent to such settlement
offer in accordance with subparagraph (D) below, the Responsible Party may
accept and enter into such settlement offer; or
(D) the Indemnitor may withhold its consent to a settlement
offer of which the Responsible Party has notified the Indemnitor in accordance
with subparagraph (C) above if the Indemnitor (x) notifies the Responsible Party
in writing within such 30-day period that the Indemnitor does not consent to the
proposed settlement, and (y) provides the Responsible Party with an opinion from
tax counsel selected by the Indemnitor and reasonably satisfactory to the
Responsible Party to the effect that there is a reasonable possibility that the
Responsible Party will prevail on the merits with respect to one or more
Indemnity Issues with an aggregate value of not less
3
<PAGE>
than the lesser of $1 million or 25% of the amount at issue with respect to the
Indemnitor in a tribunal with jurisdiction to adjudicate the Indemnity Issues;
(E) if the Indemnitor provides the Responsible Party with
written notification withholding consent in accordance with subparagraph (D)
above, then:
(1) the Indemnitor shall fully indemnify and hold
harmless the Responsible Party from and against any and all liabilities (other
than liability for payments to the Indemnitor hereunder) for Taxes and other
costs and expenses (including, without limitation, additional attorneys' and
accountants' fees) over and above the payments that the Responsible Party would
have been liable for if the Responsible Party had entered into the proposed
settlement; and
(2) the Responsible Party shall select one of the
following alternatives:
(a) the Responsible party shall enter into a closing
agreement or other final resolution with the relevant taxing authority with
respect to all issues in accordance with the proposed settlement other than
Indemnity Issues (if doing so would not preclude litigation or other judicial
proceedings with respect to the Indemnity Issues), provided that (i) such
--------
closing agreement or other final resolution specifically provides that it does
not apply to the Indemnity Issues, and (ii) the Responsible Party agrees to give
the Indemnitor and its representatives control over the relevant Proceedings,
and the Responsible Party further agrees (y) to take such actions requested by
Indemnitor or its representatives to continue to contest (or, if permitted by
applicable law, to permit the Indemnitor to contest) the Indemnity Issues
(through administrative proceedings or litigation, which proceedings or
litigation shall be conducted pursuant to the provisions of this Section 7.1
using counsel selected by the Indemnitor to the fullest extent possible), and
(z) to permit the Indemnitor, if successful, to obtain the full monetary benefit
of a successful contest;
(b) the Responsible Party shall settle all issues
with the relevant taxing authority in accordance with the proposed settlement,
in which case each of the Responsible Party and the Indemnitor shall, with
respect to its share thereof, pay any additional liability for Taxes as provided
for in such proposed settlement, provided that (i) such settlement shall
--------
specifically provide that it shall not preclude a refund claim from being filed
with respect to the Indemnity Issues and (ii) the Responsible Party agrees to
give the Indemnitor and its representatives control over the relevant
Proceedings, and agrees (y) to take such actions requested by the Indemnitor to
continue to contest (or, if permitted by applicable law, to permit the
Indemnitor to contest) the Indemnity Issues (through administrative proceedings
or litigation, which proceedings or litigation shall be conducted pursuant to
the provisions of this Section 7.1, using counsel selected by the Indemnitor to
the fullest extent possible) and (z) to permit the Indemnitor, if successful, to
obtain the full monetary benefit of such claim for refund; or
4
<PAGE>
(c) the Responsible Party shall pay to the
Indemnitor, deposit with the taxing authority, or deposit in escrow any
additional liability for Income Taxes, interest and penalties as provided for in
such settlement to the extent that such liability relates to issues other than
Indemnity Issues, and the Responsible Party agrees to give the Indemnitor and
its representatives control over the relevant Proceedings, and further agrees
(y) to take such actions requested by the Indemnitor or its representatives to
continue to contest (or, if permitted by applicable law, to permit the
Indemnitor to contest) any Indemnity and non-Indemnity Issues (through
administrative proceedings or litigation, which proceedings or litigation shall
be conducted pursuant to the provisions of this Section 7.1, using counsel
selected by the Indemnitor to the fullest extent possible) and (z) to permit the
Indemnitor, if successful, to obtain the full monetary benefit of a successful
contest.
(d) Payments to Stop Interest. An Indemnitor may, at its election,
--------------------------
pay to or deposit with the relevant taxing authority an amount of additional
Income Tax for which the Indemnitor would be liable hereunder if such payment or
deposit would have the effect of stopping the accrual of interest with respect
to such Income Tax liability. The Indemnitor shall have no further
responsibility hereunder for interest with respect to any amount so deposited or
paid for so long as such deposit or payment stops the accrual of interest;
provided, however, that any such payment or deposit does not affect any right of
- -------- -------
the Responsible Party or any other liability of the Indemnitor hereunder. The
Responsible Party shall pay to the Indemnitor the amount of any Income Tax
received by (or credited to the account of) the Indemnitee as a result of a
determination that such payment or deposit resulted in an overpayment of Income
Tax with respect to the Indemnity Issues.
(e) Termination. Notwithstanding the foregoing provisions of this
-----------
Section 7.1, the Indemnitee in its sole discretion by written notice to the
Indemnitor and the Responsible Party may refrain from contesting (through
administrative or judicial proceedings) any Indemnity Issue or may settle and
instruct the Responsible Party to settle any Indemnitee Issue with the relevant
Taxing authority without the consent of the Indemnitor, in which event each of
the Responsible Party and the Indemnitee shall be deemed to have unconditionally
waived its rights to indemnity with respect to such Indemnity Issue (and other
Indemnity Issues which are related to the Indemnity Issue which the Responsible
Party or Indemnitee refrained from contesting or settled pursuant to this
subsection (e)). In such event, the Responsible Party shall, within ten days
after the Indemnitee has decided to refrain from or settle such contest,
reimburse the Indemnitor for all amounts previously advanced, deposited or paid
to the Responsible Party, Indemnitee or any taxing authority (or deposited
pursuant to the provisions of subsection (d) of this Section 4.02) with respect
to such Indemnity Issue (and other Indemnity Issues which are related to the
Indemnity Issue which the Responsible Party or Indemnitee has refrained from
contesting or settled pursuant to this subsection (e)), other than third-party
expenses incurred by the Responsible Party or Indemnitee in contesting the
Indemnity Issue, together with interest at the rate for underpayment of Income
Tax determined pursuant to Section 6621(a)(2) of the Code in effect from time to
time, from the date of payment to the date of reimbursement.
5
<PAGE>
B. Section 5.3 through Section 5.6 of the Indemnification Agreement are
deleted.
C. Section 5.9 is added to the Indemnification Agreement to read as
follows:
5.9 Section 355(e) Notice. Promptly after the effective time of the
---------------------
Merger, CCI shall file with the appropriate Internal Revenue Service Center a
notice under Section 355(e)(4)(E) of the Code substantially in the form of
Exhibit A to Amendment No. 1 to this Agreement.
D. Section 6.5 is added to the Indemnification Agreement to read as
follows:
6.5 CCI Cooperation.
---------------
(a) In the event of a Proceeding in connection with an Income Tax
Liability that could result in a redetermination or other adjustment which could
result in liability to uBid under this Agreement (a "uBid Tax Item"), CCI shall
cooperate with uBid in its defense of such liability. Such cooperation shall
include, without limitation, upon reasonable notice: (i) promptly forwarding
copies of appropriate notices and forms or other communications (including,
without limitation, information document requests, revenue agent's reports and
similar reports, notices of proposed adjustments and notices of deficiency)
relating to a uBid Tax Item received from or sent to any Taxing Jurisdiction or
any other administrative, judicial or governmental authority, (ii) providing
copies of all relevant portions of Income Tax Returns relating to a uBid Tax
Item, together with relevant accompanying schedules and related workpapers,
document relating to rulings or other determinations by taxing authorities, and
such other records concerning the ownership and tax basis of property, or other
relevant information CCI or its Affiliates may possess with respect to a uBid
Tax Item, (iii) the provision of such additional information and explanations of
documents and information provided under this Agreement (including statements,
certificates and schedules delivered by either party) as shall be reasonably
requested by uBid or its designee, (iv) the execution of any document in form
reasonably acceptable to CCI that may be necessary or reasonably helpful in
connection with an Proceeding, including such waivers, consents or powers of
attorney as may be necessary for uBid to exercise its rights under Section 7.1
of this Agreement, and (v) the use of CCI's reasonable efforts to obtain any
documentation, affidavits or testimony from a governmental authority, a third
party or CCI's current of former shareholders, directors and employees that may
be necessary or reasonably helpful in connection with any of the foregoing.
(b) Upon reasonable notice, CCI shall make its, or shall cause its
Affiliates to make their, employees and facilities available on a mutually
convenient basis, at uBid's expense, to provide explanation of any documents or
information provided pursuant to this Section 6.5. Any information obtained by
uBid or its designee
6
<PAGE>
under this Section 6.5 shall be kept confidential, except as otherwise
reasonably may be necessary in conducting any Proceeding.
(c) CCI agrees to retain all Income Tax Returns, related schedules and
workpapers, and all material records and other documents required under Code
(S)6001 and the regulations promulgated thereunder (and any similar provision of
state, local, or foreign Income Tax law) existing on the effective date of
Amendment No. 1 to this Agreement, until the later of (x) the expiration of the
statute of limitations (including extensions) for the taxable periods to which
such Income Tax Returns and other documents relate and (y) the Final
Determination of any payments that may be required in respect of such taxable
periods under this Agreement.
(d) In the event CCI fails to comply in all material respects with the
provisions of this Section 6.5 and, uBid shall have the right to engage a
nationally recognized accounting firm of its choice to gather such information
from CCI. CCI agrees to permit such nationally recognized accounting firm full
access to all appropriate records or other information in the possession of CCI,
during CCI's normal business hours, and to promptly reimburse or pay directly
all costs and expenses in connection with the engagement of such accountants.
In addition, if CCI's failure to comply in all material respects with this
Section 6.5 cannot be remedied by the procedures described in the immediately
preceding sentence, and, as a result of such failure, uBid's ability to defend
against any uBid Tax Item is materially adversely affected, then CCI's right to
indemnification with respect to such uBid Tax Item, pursuant to Section 3.2
hereof, shall be forfeited.
E. Section 11.2 of the Indemnification Agreement is amended to read as
follows:
11.2 Arbitrator. The arbitrator shall be selected as provided in Article
----------
VIII of the Distribution Agreement, provided that the arbitrator shall be an
attorney or accountant who is generally recognized in the tax community as a
qualified and competent tax practitioner with experience in the tax area
involved in the issue or issues to be resolved.
F. Section 12.10 is added to the Indemnification Agreement to read as
follows:
12.10. Guarantee. CMGI, as a primary obligor, unconditionally and
---------
irrevocably guarantees to CCI the due and punctual performance by uBid and any
assign of uBid of all of the obligations of uBid and any assign of uBid under
this Agreement (collectively, the "Obligations"), including Obligations arising
out of actions occurring on or prior to the effective date of Amendment No. 1 to
this Agreement. If uBid or any assign of uBid fails to satisfy any such
Obligations in the manner and in the time so required, CMGI shall satisfy such
Obligations upon demand by CCI. CMGI's guarantee shall be a continuing
guarantee and is irrevocable and unconditional and shall remain in full force
and effect until all Obligations hereunder are satisfied. CCI shall have no
obligation to pursue any remedy or take any action against or in respect of uBid
or any assign of uBid prior to enforcing their rights under this Agreement
directly against CMGI. In its
7
<PAGE>
capacity as a guarantor, CMGI expressly waives all benefit or advantage of any
law wherever enacted or any defenses which may be available to it which may
affect the performance of its obligations pursuant to this Section 12.10;
provided, however, that the foregoing shall not be construed as a limitation on
- -------- -------
CMGI's right to assert any defense, claim or counterclaim available to uBid
under this Agreement or to it as subrogee to uBid's obligations hereunder.
G. No Breach
CCI acknowledges and agrees that neither the negotiation of the Merger
nor the consummation thereof constitutes a breach of uBid's obligations under
Article V of the Indemnification Agreement. uBid and CMGI acknowledge and agree
that the provisions of this Paragraph G do not constitute a waiver by CCI of any
rights pursuant to Section 3.2 of the Indemnification Agreement or Section 12.10
of the Indemnification Agreement (as added by Paragraph F of this Agreement).
H. This Agreement shall be effective as of the Effective Date of the
Merger; provided, however, that this Agreement shall be void and of no effect if
-------- -------
the effective time of the Merger does not occur on or before August 31, 2000.
IN WITNESS WHEREOF, CCI, uBid and CMGI have caused this Amendment to be
signed by their respective officers, thereunto duly authorized as of the date
first written above.
Creative Computers, Inc.
By: /s/ Theodore Sanders
----------------------------------
Title: Chief Financial Officer
uBid, Inc.
By: /s/ Gregory K. Jones
----------------------------------
Title: Chief Executive Officer
CMGI, Inc.
By: /s/ Andrew J. Hajducky III
----------------------------------
Title: Executive Vice President,
Chief Financial Officer and
Treasurer
8
<PAGE>
EXHIBIT A
SECTION 355(e)(4)(E) NOTICE
[To be filed with
the IRS Service Center
where CCI files its federal
income tax return, or such
other place as the IRS may
designate]
Re: Creative Computers, Inc. , EIN ______________
Protective Section 355(e)(4)(E) Notice
On June 7, 1999, Creative Computers, Inc. ("CCI") distributed to its
shareholders all of the outstanding stock held by CCI in uBid, Inc., EIN
___________ ("uBid") in a transaction to which IRC (S)355 applies (the
"Distribution").
On ________, 2000, pursuant to an Agreement and Plan of Merger and
Reorganization by and among CMGI, Inc., Setec, Inc. and uBid dated as of
February ______, 2000, Setec, Inc, a wholly-owned subsidiary of CMGI, Inc.,
merged into and with uBid, with uBid surviving (the "Merger"). In the Merger,
shareholders of uBid exchanged their uBid shares for shares of CMGI, Inc., and
uBid became a wholly-owned subsidiary of CMGI, Inc.
CCI believes, based upon an opinion of its tax advisors, that the
Distribution is not a distribution to which Section 355(e) applies because the
Distribution and the Merger are not part of a plan (or series of related
transactions) described in Section 355(e)(2)(A)(ii). In order to commence the
statute of limitations with respect to the Distribution in the event the
Internal Revenue Service takes a contrary position, CCI provides this notice.
[Signature]
9
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into effective
as of December 20, 1999 (the "Effective Date"), by and between GREGORY K. JONES
("Executive"), an individual, and uBID, INC. (the "Company"), a Delaware
corporation with principal offices located at 8550 Bryn Mawr Avenue, Suite 200,
Chicago, Illinois, 60631 (Executive and Company are collectively referred to
herein as the "Parties").
WHEREAS, Executive and Company entered into an employment agreement
dated October 22, 1997 (the "1997 Employment Agreement"), pursuant to which
Executive became employed as President and Chief Executive Officer of the
Company, on the terms and conditions set forth therein;
WHEREAS, Executive and the Company wish to supersede the 1997
Employment Agreement with this Agreement;
WHEREAS, Executive was granted certain options to purchase 366,494
shares of Common Stock of the Company pursuant to the Informal Stock Option Plan
(the "Original Stock Options");
WHEREAS, Company desires to continue to employ Executive, and
Executive desires to continue employment with the Company, on the terms
contained herein;
ACCORDINGLY, this Agreement is hereby entered into to provide for such
continued employment.
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the Parties consent and agree as follows:
1. Employment. Company hereby employs Executive as its President,
----------
Chief Executive Officer and Chairman of the Board of Directors (the "Board").
During the Term of Employment (as hereinafter defined), Executive will have the
title, status and duties of President, Chief Executive Officer, and Chairman of
the Board, and will report directly to the Board.
2. Duties. During the Term of Employment:
------
(a) Executive shall be responsible for all business development and
corporate functions of the Company, as well as such other duties as may be
assigned to him from time to time by the Board and as are not inconsistent
with
1
<PAGE>
the duties typically vested in a President, Chief Executive Officer, and
Chairman of the Board of a corporation.
(b) Executive will devote his full time and best efforts, talents,
knowledge and experience to serving as the Company's President, Chief
Executive Officer, and Chairman of the Board. Executive shall perform the
foregoing duties in the Company's Chicago, Illinois location. Executive
acknowledges that the duties to be performed by him under this Agreement
are such that he may be required to travel in connection with the Company's
business. Executive agrees to engage in any travel which the Board of
Directors may deem necessary to the performance of his duties.
(c) Except upon the prior written consent of the Board of Directors,
during his employment with the Company, Executive shall not engage (in any
capacity) in any other business, commercial, or professional activity
(whether or not pursued for pecuniary advantage) that is competitive with
the Company, that creates a conflict of interest between Executive and the
Company or any partner, joint venturer, or affiliated entity of the
Company, or that impairs or otherwise interferes with the Executive's
performance of his duties under this Agreement. Executive may serve on the
board of directors of no more than four other companies (or such greater
number as the Company's board of directors shall approve in advance),
subject to the foregoing limitations and again only with written approval
of the Company's board of directors. Executive may participate in other
activities such as the supervision of personal investments, speaking
engagements, activities involving charitable, educational, and similar
types of activities; provided that such activities do not, in the judgment
of the board of directors, compete with the Company or conflict or
otherwise interfere with the Company's business or the Executive's
performance of his duties under this Agreement. The time involved in such
activities shall not be treated as vacation time. Executive shall be
entitled to keep any amounts paid to him in connection with such activities
(e.g., director fees and honoraria).
3. Term of Employment. The "Term of Employment," will commence on
------------------
the Effective Date, and will continue thereafter until three years from the
Effective Date and will be automatically extended for subsequent one (1) day
periods for each day of the Term of Employment that passes after the Effective
Date, unless sooner terminated by either Party in accordance with the provisions
of this Agreement. The intent of the foregoing provision is that this Agreement
becomes "evergreen" on the Effective Date so that on each passing day after the
Effective Date the Term of Employment automatically extends to a full three-year
period.
4. Compensation and Benefits. During the Term of Employment, Company
-------------------------
shall provide to Executive, and Executive shall accept from Company, as full
compensation for Executive's services hereunder, compensation and benefits as
follows:
2
<PAGE>
(a) Base Salary. Commencing on February 1, 2000, and throughout the
-----------
Term of Employment, Executive shall be paid an annual base salary ("Base
Salary") of Two Hundred Fifty Thousand Dollars ($250,000). The Board, or
such committee of the Board as is responsible for setting the compensation
of senior executive officers, shall review Executive's performance and Base
Salary annually in January of each year, and determine whether to adjust
Executive's Base Salary on a prospective basis. The Company will provide
the first review in or around January 2001. Such adjusted annual salary
then shall become Executive's "Base Salary" for purposes of this Agreement.
Executive's annual Base Salary shall not be reduced after any increase,
without Executive's consent. The Company shall pay Executive's Base Salary
according to payroll practices in effect for the Company's other senior
executive officers.
(b) Bonus and Incentive Compensation; Perquisites. Executive shall be
---------------------------------------------
eligible to participate in any annual performance bonus plans, long-term
incentive plans, and/or equity-based compensation plans established or
maintained by the Company for its senior executive officers, including, but
not limited to, the uBid, Inc. 1998 Stock Incentive Plan (the "1998 Stock
Plan"). Each year, Executive shall be eligible to receive a preestablished
annual bonus, at a target amount equal to fifty percent (50%) of
Executive's then current Base Salary, based on the attainment of objectives
mutually agreeable to Executive and the Board. The Company will provide
Executive with the same type and level of perquisites as it provides to
other senior executive officers of the Company.
(c) Employee Benefits. Executive will be eligible to participate on
-----------------
substantially the same basis as the Company's other senior executive
officers in any employee or executive benefit plans offered by the Company
including, without limitation, medical, dental, short-term and long-term
disability, life insurance, pension, profit sharing and nonqualified
deferred compensation arrangements. The Company reserves the right to
modify, suspend or discontinue any and all of the plans, practices,
policies and programs at any time without recourse by Executive, so long as
Company takes such action generally with respect to other similarly
situated senior executive officers.
(d) Business Expenses. Company shall reimburse Executive for
-----------------
reasonable, ordinary, and necessary business or entertainment expenses,
incurred in the performance of his duties hereunder, in accordance with
Company's policies for senior executive officers and upon presentation of
appropriate documentation, as the Company may from time to time require.
3
<PAGE>
(e) Vacation. Executive shall be entitled to paid vacation in
accordance with the Company's vacation policy for senior executive
officers, but in no event less than three (3) weeks vacation during each
calendar year of the Term of Employment, and shall be entitled to holidays,
sick days and personal days in accordance with the Company's policy for its
employees generally. Unused vacation time shall be either paid upon request
or, alternatively, carried over for a period not in excess of twelve (12)
months.
5. Payments on Termination of Employment.
-------------------------------------
(a) Termination of Employment for any Reason. The following payments
----------------------------------------
will be made upon the termination of Executive's employment for any reason:
(i) Earned but unpaid Base Salary through the date of
termination;
(ii) Any annual incentive plan bonus, or other form of incentive
compensation, for which the performance measurement period has ended,
but which is unpaid at the time of termination;
(iii) Any accrued but unpaid vacation;
(iv) Any amounts payable under any of the Company's executive
benefit plans in accordance with the terms of those plans, except as
may be required under Code Section 401(a)(13); and
(v) Subject to the conditions and limitations imposed by Section
4(d) hereof, unreimbursed business expenses reasonably incurred by
Executive in connection with his duties on behalf of the Company.
(b) Voluntary Termination of Employment for Other Than Good Reason.
--------------------------------------------------------------
In addition to the amounts determined under (a) above, if Executive
voluntarily terminates employment for other than Good Reason, then in
addition to the amounts determined under (a) above, Executive shall be
entitled to a pro rata portion of the target bonus under the Company's
annual incentive plan for the year in which such termination occurs.
(c) Termination of Employment for Death or Disability. In addition to
-------------------------------------------------
the amounts determined under (a) above, if Executive's termination of
employment occurs by reason of death or Disability, Executive (or his
estate) will receive a pro rata portion of any bonus payable under the
Company's annual incentive plan for the year in which such termination
occurs determined based on the highest of (i) the actual annual bonus paid
for the fiscal year immediately preceding such termination, (ii) the target
bonus for the fiscal year in which such termination occurs, or (iii) the
actual bonus attained for the fiscal year in which
4
<PAGE>
such termination occurs. For purposes of this Agreement, "Disability" means
Executive's long-term disability as defined under the Company's long-term
disability plan, or if Executive is not covered by a long-term disability
plan sponsored by the Company, Executive's inability to engage in any
substantial gainful activity by reason of any medically-determined physical
or mental impairment that can be expected to result in death or to be of
long-continued and indefinite duration.
(d) Termination by the Company Without Cause, or Voluntary Termination
------------------------------------------------------------------
by Executive for Good Reason. If the Company terminates Executive's
----------------------------
employment other than for Cause, or Executive voluntarily terminates his
employment for Good Reason, in addition to the benefits payable under (a),
the Company will pay the following amounts and provide the following
benefits, subject to and conditioned upon Executive's execution of a
general release of claims in a form to be provided and approved by the
Company:
(i) The Base Salary that the Company would have paid under the
Agreement had Executive's employment continued to until the six month
anniversary of his employment termination.
(ii) The annual bonus that the Company would have paid under the
Agreement had Executive's employment continued until the later of the
six month anniversary of his employment termination, or the end of the
Company's fiscal year in which Executive's employment terminated. For
this purpose, annual bonus will be determined as the highest of (A)
the actual bonus paid for the fiscal year immediately preceding such
termination, (B) the target bonus for the fiscal year in which such
termination occurs, or (C) the actual bonus attained for the fiscal
year in which such termination occurs.
(iii) Continued coverage under the Company's medical, dental,
life, disability, pension, profit sharing and other executive benefit
plans through the end of month containing the six month anniversary of
Executive's employment termination, at the same cost to Executive as
in effect on the date of Executive's termination. If the Company
determines that Executive cannot participate in any benefit plan
because he is not actively performing services for the Company, the
Company may provide such benefits under an alternate arrangement, such
as through the purchase of an individual insurance policy that
provides similar benefits or, if applicable, through a nonqualified
pension or profit sharing plan. To the extent that Executive's
compensation is necessary for determining the amount of any such
continued coverage or benefits, such compensation (Base Salary and
annual bonus) through the end of the covered period shall be at the
highest rate in effect during the 12-month period immediately
preceding Executive's termination of employment.
5
<PAGE>
(iv) The period through the end of the six month anniversary of
Executive's employment termination shall continue to count for
purposes of determining Executive's age and service with the Company
with respect to (A) eligibility, vesting, and the amount of benefits
under the Company's executive benefit plans, and (B) the vesting of
any outstanding stock options, restricted stock or other equity-based
compensation awards.
(v) Outplacement services, as elected by Executive (and with a
firm elected by Executive), not to exceed $10,000 in total.
(e) Good Reason. For purposes of this Agreement, "Good Reason" shall
-----------
mean the occurrence of any of the following without Executive's written
consent: (i) assigning duties to Executive that are inconsistent with those
of the position of President, Chief Executive Officer, and Chairman of the
Board, as those duties apply in similar companies in similar industries;
(ii) requiring Executive to report to other than the Board; (iii) the
failure of the Company to pay any portion of Executive's compensation
within 10 days of the date such compensation is due; (iv) the Company
requires Executive to relocate his principal business office to a location
not within 25 miles of the Company's principal business office located in
the Chicago, Illinois metropolitan area; or (v) the Company's failure to
continue in effect any cash or stock-based incentive or bonus plan, pension
plan, welfare benefit plan, or other benefit plan, program or arrangement,
unless the aggregate value of all such arrangements provided to Executive
after such discontinuance is not materially less than the aggregate value
as of the Effective Date. For purposes of this paragraph, "Company" shall
mean the Company and, following any successor or surviving corporation
following a Change in Control or Corporate Transaction (as those terms are
defined in the 1998 Stock Plan). Notwithstanding the foregoing definition,
"Good Reason" shall not exist unless Executive provides the Company's Board
of Directors with written notice of the alleged cause of the "Good Reason"
and the Company fails to cure the cause of the Good Reason within thirty
(30) days from the date of such notice.
(f) Cause. For purposes of this Agreement, "Cause" means Executive's:
-----
(i) continued and willful or grossly negligent failure to substantially
perform his duties hereunder (other than any such failure in connection
with death or disability); (ii) conviction of a felony or conduct involving
moral turpitude or other criminal conduct materially adversely affecting
the Company; or (iii) fraud, misappropriation, or embezzlement involving
Company property; or (iv) commission of other intentional wrongful acts
that materially impair the goodwill or business of the Company or that
cause material damage to its property, goodwill or business. If the
termination for Cause is pursuant to clause (i) of this paragraph (f), then
prior to any such termination for Cause, the Board will give Executive
thirty days (30) written notice and an opportunity to cure such conduct.
For purposes of this paragraph, no act or failure to act on Executive's
part will be considered "willful" unless it is done, or omitted to be done,
by him in bad faith or without a reasonable belief that his action or
omission was in the Company's
6
<PAGE>
best interests. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the Board or based upon the advice
of the Company's counsel will be conclusively presumed to be done, or
omitted to be done, in good faith and in the Company's best interests, in
the absence of evidence indicating that such authority was provided by
persons with a personal interest in the act, omission, or transaction.
7. Restrictive Covenants.
---------------------
(a) Definitions. For purposes of this Agreement, the following terms
-----------
will be defined as follows:
(i) The "Company's Business" will mean the business of business-
to-consumer auctions conducted by the Company or any of its Related
Entities as of the Effective Date.
(ii) The term "Related Entities" will mean (i) any entity that
the Company directly or indirectly controls, and (ii) any entity in
which the Company has a significant equity interest.
(b) Confidential Information. Executive acknowledges that he has had
------------------------
and will have access to confidential information (including, but not
limited to, current and prospective confidential know-how, technology,
trade secrets, customer lists, mailing lists, marketing plans, business
plans and product information) concerning the business, customers,
products, plans, finances, suppliers, and assets of the Company and its
Related Entities that is not generally known outside the Company
("Confidential Information"). "Confidential Information" shall not include
information that would otherwise constitute Confidential Information but
that has become public other than through a breach of this Agreement or
other improper means. Executive agrees that he shall not, at any time,
directly or indirectly use, divulge, furnish or make accessible to any
person any Confidential Information, but instead shall keep all
Confidential Information strictly and absolutely confidential except as
required by law. Executive agrees that the obligations under this Section
shall survive termination of his employment with the Company, for any
reason and by either party. The preceding obligations of confidence and
nondisclosure shall not apply to:
(i) information in the possession of Executive prior to the
disclosure thereof by the Company;
(ii) information in the public domain, except information that
becomes public through violation of the covenants set forth in this
Section 7;
(iii) information obtained from a third person not under an
obligation of nondisclosure to the Company;
7
<PAGE>
(iv) information required by law or legal process to be
disclosed, provided advance notice thereof is given to the Company;
and
(v) information disclosed with the Company's written approval.
(c) Non-Competition. Executive agrees that commencing on the
---------------
Effective Date of this Agreement and continuing for a period of twelve (12)
months following termination of his employment by either party for any
reason (the "Non-Compete Period"), he shall not, without the prior written
consent of the Board, participate or engage in, directly or indirectly (as
an owner (except as a passive owner of not more than 5% of any class of
publicly-traded securities, so long as Executive has no active
participation in the business of such entity), partner, employee, officer,
director, independent contractor, consultant, advisor, or in any other
capacity calling for the rendition of services, advice, or acts of
management, operation, or control), any business that competes or intends
to compete with the Company's Business.
(d) Non-Solicitation of Employees. Executive agrees that, during the
-----------------------------
Non-Compete Period, he shall not directly or indirectly solicit any
employee of the Company to leave such employment.
(e) Non-Solicitation of Customers. Executive agrees that during the
-----------------------------
Non-Compete Period, he shall not directly or indirectly solicit, in
connection with any business or activity that is competitive with the
Company's Business, any entity that is or becomes a customer of the Company
or any of the Related Entities at or before the time of the termination of
Executive's employment.
(f) No Diversion of Business Opportunities and Prospects. During the
----------------------------------------------------
Non-Compete Period, Executive shall not directly or indirectly seek to
divert or dissuade from continuing to do business with or entering into
business with the Company or any of the Related Entities, any supplier,
customer, or other person or entity that had a business relationship with
the Company or with which Company was actively planning or pursuing a
business relationship (and of which Executive had knowledge) at or before
the time of termination of Executive's employment.
(g) Irreparable Harm. Executive acknowledges that (i) Executive's
----------------
compliance with this Section is necessary to preserve and protect the
proprietary rights, Confidential Information and the goodwill of the
Company and the Related Entities, as going concerns; (ii) any failure by
Executive to comply with the provisions of this Section will result in
irreparable and continuing injury for which there will be no adequate
remedy at law; and (iii) in the event that Executive should fail to comply
with the terms and conditions of this Section, the Company shall be
entitled, in addition to such other relief as may be proper, to equitable
relief (including, but not limited to, the issuance of an injunction and/or
temporary restraining order) as may be necessary to cause Executive to
comply
8
<PAGE>
with this Agreement, to restore to the Company its property, and to make
the Company whole.
8. Intellectual Property. During the Term of Employment, Executive
---------------------
will disclose to the Company all ideas, inventions and business plans developed
by him during such period which relate directly to the Company's Business,
including without limitation, any design, logo, slogan or campaign or any
process, operation, product or improvement that may be patentable or
copyrightable. Executive agrees that all patents, licenses, copyrights,
tradenames, trademarks, service marks, advertising campaigns, promotional
campaigns, designs, logos, slogans and business plans developed or created by
Executive in connection with the Company's Business, either individually or in
collaboration with others, will be deemed works for hire and the sole and
absolute property of the Company. Executive agrees, that at the Company's
request, he will take all steps necessary to secure the rights thereto to the
Company by patent, copyright or otherwise.
From time to time during and after the Term of Employment, Executive
will be involved in other businesses. The Company agrees that Executive will
not disclose to the Company any ideas, inventions and business plans developed
- ---
by him during such period which relate to such other businesses, including
without limitation, any design, logo, slogan or campaign or any process,
operation, product or improvement that may be patentable or copyrightable. The
Company agrees that all patents, licenses, copyrights, tradenames, trademarks,
service marks, advertising campaigns, promotional campaigns, designs, logos,
slogans and business plans developed or created by Executive in connection with
the other businesses will be the sole and absolute property of Executive.
9. Modification. No modification, amendment or waiver of this
------------
Agreement, nor consent to any departure from any of the terms or conditions
hereof, shall be effective unless in writing and signed by the Parties hereto.
Any such waiver or consent shall be effective only in the specific instance and
for the purpose for which given. The failure of any Party hereto to enforce at
any time any provision of this Agreement shall not be construed to be a waiver
of such provision, nor in any way to affect the validity of this Agreement or
any part hereof or the right of any Party thereafter to enforce each and every
such provision.
10. Other Agreements. This Agreement sets forth and constitutes the
----------------
entire agreement and understanding between the Parties with respect to the
subject matter of this Agreement. This Agreement supersedes and cancels all
prior agreements and understandings, whether written or oral, relating to the
subject matter of this Agreement, including Executive's 1997 Employment
Agreement. This instrument shall have no effect on Executive's Original Stock
Options or on any stock options granted to Executive under the Company's 1998
Stock Incentive Plan, nor shall this instrument affect any rights and benefits
afforded to Executive in his capacity as a stockholder under the Company's
certificate of incorporation or by-laws.
9
<PAGE>
11. Insurance and Indemnity. For the period from the date hereof
-----------------------
through at least the tenth anniversary of Executive's termination of employment
from the Company, the Company agrees to maintain Executive as an insured party
on all directors' and officers' insurance maintained by the Company for the
benefit of its directors and officers on at least the same basis as all other
covered individuals, and provide Executive with at least the same corporate
indemnification as its officers.
12. Assignment; Successors. Executive may not assign this Agreement
----------------------
at any time without the express written consent of the Company. This Agreement
shall inure to the benefit of and be binding upon the Company and its
successors. The Company may not assign this Agreement without Executive's
written consent, except that the Company's obligations under this Agreement
shall be the binding legal obligations of any successor to the Company by sale,
and in the event of any transaction that results in the transfer of
substantially all of the assets or business of the Company, the Company will use
its best efforts to cause the transferee to assume the Company's obligations
under this Agreement. If the transferee does not assume the Company's
obligations under this Agreement, Executive shall have Good Reason to terminate
employment. Upon Executive's death, this Agreement will inure to the benefit of
Executive's heirs, legatees, and legal representatives of the Executive's
estate.
13. Arbitration.
-----------
(a) Arbitrable Claims: To the fullest extent permitted by law, all
-----------------
disputes between Executive (and his successors and assigns) and the Company (and
its parents, subsidiaries, affiliated entities, shareholders, directors,
officers, agents, employees, successors, and assigns) relating in any manner
whatsoever to the relationship between Executive and the Company, including,
without limitation, all disputes arising under or relating to this Agreement
("Arbitrable Claims") shall be resolved by arbitration. Arbitrable Claims shall
include, but are not limited to, contract (express or implied) and tort claims
of all kinds, as well as all claims based on any federal, state, or local law,
statute, or regulation.
(b) Procedure: Arbitration of Arbitrable Claims shall be in
---------
accordance with the then-existing and applicable rules of the American
Arbitration Association ("AAA"), as augmented in this Agreement. Arbitration
shall be final and binding upon the parties and shall be the exclusive remedy
for all Arbitrable Claims. Notwithstanding the foregoing, either party may, at
their option, seek provisional injunctive relief as may be necessary to preserve
the efficacy of a pending or contemplated arbitration proceeding. All
arbitration hearings under this Agreement shall be conducted in Chicago,
Illinois. The parties hereby waive any rights they may have to trial by jury in
regard to Arbitrable Claims, including, without limitation, any right to trial
by jury as to the making, existence, validity, or enforceability of the
agreement to arbitrate contained within this Section.
(c) Law Governing Arbitration Provision: The foregoing arbitration
-----------------------------------
provision shall be governed by, and shall be considered fully enforceable under,
the
10
<PAGE>
provisions of the Federal Arbitration Act, which the parties hereby acknowledge
and agree applies to arbitration provisions contained within employment
agreements.
14. Notices. All notices required to be given under the terms of the
-------
Agreement, or that either of the Parties desires to give hereunder, shall be in
writing and delivered personally, by overnight courier or by confirmed
facsimile, or be sent by registered mail or certified mail, postage prepaid,
return receipt requested, addressed as follows:
If to Company:
Attn: Compensation Committee
uBid Online Auction
8550 West Bryn Mawr Avenue
Suite 200
Chicago, Illinois 60631-3203
with a copy to:
Robert Mattson, Esq.
Morrison & Foerster LLP
19900 MacArthur Boulevard
Suite 1200
Irvine, California 92612-2445
If to Executive:
Mr. Gregory K. Jones
366 Bluff's Edge Drive
Lake Forest, IL 60045
with a copy to:
Mark Heatwole, Esq.
Winston & Strawn
35 West Wacker Drive
Chicago, IL 60601
Any Party may change the address to which notice is to be sent to it or to him
by notice in writing to the other Party as provided above.
15. Governing Law. This Agreement shall be subject to and governed
-------------
by the laws of the State of Illinois, without regard to the conflicts of laws
principles thereof.
16. Severability. If any provision(s) of this Agreement shall be
------------
found invalid or unenforceable, in whole or in part, then such provision(s)
shall be deemed to be modified or restricted to the extent and in the manner
necessary to render the same valid
11
<PAGE>
and enforceable, or shall be deemed excised from this Agreement, as the case may
require, and this Agreement shall be construed and enforced to the maximum
extent permitted by law, as if such provision(s) had been originally
incorporated herein as so modified or restricted, or as if such provision(s) had
not been originally incorporated herein, as the case may be.
17. Counterpart Execution. This Agreement may be executed in
---------------------
multiple counterparts, each of which shall be deemed an original.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
GREGORY K. JONES uBID, INC.
/s/ Gregory K. Jones By: /s/ Thomas E. Werner
- --------------------------- ___________________________________
Its: Chief Financial Officer
__________________________________
12
<PAGE>
EXHIBIT 10.7
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
1
<PAGE>
(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
(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
2
<PAGE>
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.
(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.
3
<PAGE>
(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.
4
<PAGE>
(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.
----
(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
5
<PAGE>
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 31 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 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
6
<PAGE>
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.
7
<PAGE>
(c) Effect of Administrator's Decision. All decisions,
----------------------------------
determinations and interpretations of the Administrator shall be conclusive and
binding on all persons.
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
8
<PAGE>
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.
(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
9
<PAGE>
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
(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.
10
<PAGE>
(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.
11
<PAGE>
(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 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.
12
<PAGE>
(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 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
13
<PAGE>
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 of ten (10)
years unless sooner
14
<PAGE>
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
15
<PAGE>
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.
16
<PAGE>
EXHIBIT 10.15(B)
AMENDMENT TO PROGRAM
LICENSE AND PROFESSIONAL SERVICES AGREEMENT
This Amendment No. 1 (this "Amendment") is made as of 27 October 1999 by
and between uBid, Inc., a Delaware corporation having its principal place of
business at 2525 Busse Road, Elk Grove Village, IL 60007, U.S.A. ("uBid"), and
LibertyOne Limited, an Australian corporation having its principal place of
business at Level 2, 80 McLachlan Avenue, Rushcutters Bay, NSW 2011, Australia
("LibertyOne") (hereinafter referred to collectively as the "Parties" and
individually as a "Party").
WHEREAS, uBid and LibertyOne entered into a Program License and
Professional Services Agreement on 6 June 1999 (the "Agreement") wherein uBid
licensed its proprietary auction software to LibertyOne.
WHEREAS, uBid and LibertyOne wish to amend Section 2.1 of the Agreement to
allow LibertyOne to sublicense its rights and duties under the Agreement to
joint ventures throughout the Licensed Territory (as such term is defined in the
Agreement) in which LibertyOne holds no less than a fifty percent (50%) equity
interest, and to further allow such sublicensees to sublicense their rights and
duties under the Agreement to joint ventures throughout the Licensed Territory
(as such term is defined in the Agreement) in which LibertyOne ultimately holds
no less than fifty percent (50%) equity interest.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the Parties hereby agree as follows:
1. Section 2.1. The last two sentences of Section 2.1 of the Agreement
-----------
are hereby deleted and replaced with the following:
Notwithstanding anything herein to the contrary, LibertyOne may sublicense
its rights under Section 2.1 of this Agreement solely to other entities
located in the Licensed Territory in which LibertyOne holds no less than a
fifty percent (50%) equity interest but only for so long as LibertyOne
retains no less than a fifty percent (50%) equity interest in such
entities; provided, however, LibertyOne shall be responsible for ensuring
that any sublicensee uses the Subject software in accordance with the terms
and conditions set forth in this Agreement and shall be responsible for,
and will indemnify and hold uBid harmless from the against, the acts and
omissions of such sublicensees. Further, authorized sublicensees may
sublicense their rights obtained by virtue of Section 2.1 of this Agreement
solely to other entities located in the licensed Territory in which
LibertyOne holds no less than a fifty percent (50%) equity interest but
only for so long as LibertyOne retains no less than a fifty percent (50%)
equity interested in such entities; provided, however, LibertyOne shall be
responsible for ensuring that any such entities use the Subject Software in
accordance with the terms and conditions set forth in this Agreement and
shall be responsible for, and will indemnify and hold uBid harmless from
and against, the acts and omissions of such entities. Except
1
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as permitted by this Section 2.1, LibertyOne will not sublicense the rights
and licenses granted by this Agreement. Any sublicense hereunder shall be
in writing, shall be signed by sublicensor and sublicensee and shall
contain restrictions on sublicensees commensurate with the restrictions
imposed herein on LibertyOne. LibertyOne and any sublicensee shall,
promptly upon entering into any sublicense agreement, provide written
notice to uBid of the existence of such sublicense and the name and address
of such sublicensee.
2. General. Except as expressly modified by this Amendment, all terms,
-------
conditions and provisions of the Agreement shall continue in full force and
effect as set forth in the Agreement. Except as otherwise modified or defined
herein, all capitalized terms in this Amendment have the same meanings as set
forth in the Agreement. In the event of a conflict between the terms and
conditions of the Agreement and the terms and conditions of this Amendment, the
terms and conditions of this Amendment shall prevail. Each Party represents and
warrants to the other Party that this Amendment has been duly authorized,
executed and delivered by it and constitutes a valid and legally binding
agreement with respect to the subject matter contained herein. Each Party
agrees that the Agreement, as amended by this Amendment, constitutes the
complete and exclusive statement of the agreement between the Parties, and
supersedes all prior proposals and understandings, oral and written, relating to
the subject matter contained herein. This Amendment shall not be modified or
rescinded except in writing signed by the Parties.
IN WITNESS WHEREOF, the Parties have caused this Amendment to be
executed by their duly authorized representatives:
LIBERTYONE LIMITED UBID, INC.
By: [illegible] By: /s/ J. D. Ludvigsen
------------------------------ -------------------------------
Name: [illegible] Name: J. D. Ludvigsen
----------------------------- -------------------------------
Title: [illegible] Title: VP--International
---------------------------- ------------------------------
2
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EXHIBIT 10.19
November 30, 1999
Kenneth Dotson
332 Isle of Palms
Ft. Lauderdale FL, 33301
Dear Kenneth:
This letter hereby confirms our preliminary agreement of November 11, 1999
(subject to final documentation) concerning your becoming an employee of uBid,
Inc. This letter confirms the substance of our agreement on November 11.
You have accepted our offer to become Chief Marketing Officer of uBid, Inc.
starting on December 6, 1999. As a function of our growing company needs, you
may be assigned other duties as necessary and your responsibilities may change
from time to time.
Your compensation and benefits will include:
1. A salary of $3,173 per week payable in accordance with uBid payroll
practices.
2. Participation in the company sponsored medical, dental, 401(k) and other
benefit plans.
3. Three weeks per year of paid vacation, according to the uBid vacation
policy.
4. Participation in the bonus program, if and when, it becomes available.
5. Participation in the employee stock purchase program, if and when, it
becomes available.
You will be granted an option to purchase 180,000 shares of uBid Common Stock,
effective November 11, 1999 (the "Grant Date"), with an exercise price equal to
the closing price of uBid's common stock as of that date, subject of course to
your commencement of employment under the terms of this letter. The option will
be fully dilutable (except in the event of a stock split or revenue stock split
as more fully set forth in an Option Agreement provided.) The option will vest
in equal yearly installments over a period of 4 years starting from the Grant
Date. The option shall expire 90 days after you are no longer with the Company.
If your Employment is terminated by the Company for Cause (as defined below),
the unvested portion of the Option shall terminate on the date of such
termination. For purposes hereof, the term "Cause" shall mean that any one (1)
or more of the following has occurred:
(i) You shall have been convicted of, or shall have pleaded guilty or nolo
contendere to, any felony or a crime involving moral turpitude;
1
<PAGE>
(ii) You shall have repeatedly or consistently failed or refused to perform
the duties assigned to you hereunder or shall have otherwise breached any of the
terms or conditions of employment with the Company, after written notice and ten
(10) days opportunity to cure; and
(iii) You shall have committed any fraud, embezzlement, misappropriation
of funds, breach of fiduciary duty or other act of dishonesty against the
Company.
If you are terminated for any reason but Cause you will be entitled to three
months severance and acceleration in option vesting as follows: in the first
year of employment you will be given vesting of options equal to the first year
(25%) regardless of when you are terminated. In the subsequent years, you will
be given an additional year of vesting (25%) plus credit for time served (as
determined on a pro-rata monthly basis) while employed by uBid, as more fully
set forth in the option agreement.
In the case of a "Corporate Transaction" as defined in the option agreement
(including the changes of control described therein), you will be entitled to
full vesting rather than the vesting specified in the agreement.
In addition, you will be entitled to an interest free loan of $16,000 to move
your residence. This loan will be forgiven on a quarterly basis at a rate of
$4,000 per quarter. At the end of the first year you will owe nothing. This
will be paid to you when you show you have purchased or rented permanent
residence in the Chicago area. You agree that should you leave the company
prior to that time, you would owe the remainder of the loan back to the
business. If your employment is terminated other than for Cause, the loan will
be forgiven entirely.
In addition, you will be entitled to reimbursement for reasonable temporary
living expenses in accordance with company policy for 60 days following your
start date.
Your employment is contingent on a successful background and reference check,
board approval, a pre-employment drug screen and your signature on a
confidentiality and non-compete agreement (attached). We hope our association
will continue for a substantial period of time, but recognize that neither you
nor the Company can give assurance of a permanent employment relationship.
Therefore, in accordance with our standard policy, either you or the Company may
end the employment relationship at any time for any reason, with or without
cause.
I am very pleased that you will be joining the uBid team. I believe that you
will make a very significant contribution to our success. Please sign a copy of
this letter and return it to me. I look forward to working with you.
2
<PAGE>
Sincerely,
UBID, INC.
/s/ GREGORY K. JONES
- ----------------------------------
By: Gregory K. Jones
CEO, uBid, Inc.
Agreed:
/s/ KENNETH DOTSON December 1, 2000
- ---------------------------------- ----------------
Signature Date
3
<PAGE>
EXHIBIT 10.20
AMENDMENT
This Amendment is entered into by and among uBid, Inc., a Delaware
corporation (the "Company"), CMGI, Inc., a Delaware corporation ("CMGI") and the
undersigned employee of the Company (the "Employee") as of February 9, 2000.
WHEREAS, the Company and the Employee are parties to certain Stock
Option Award Agreements (collectively, the "Agreements"), relating to the
capital stock of the Company and pursuant to which the Employee's options
underlying the Agreements will vest upon certain circumstances, including upon
the Effective Time of the Merger as defined in the Merger Agreement described
below.
WHEREAS, the Company is entering into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") on the date hereof by and among
CMGI, Senlix Corporation, a Delaware corporation and a wholly owned subsidiary
of CMGI, and the Company, pursuant to which the Employee will receive options to
purchase CMGI common stock, as set forth in the Merger Agreement.
Now therefore, as an inducement for CMGI to enter into the Merger
Agreement and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties, intending to be
legally bound, hereby agree as follows:
1. The parties hereto hereby agree that, notwithstanding anything to
the contrary in the Agreements, the options that have been issued to the
Employee will not vest in full upon the Effective Time; instead, upon the
Effective Time, such Employee's options shall vest only as to:
(i) in the case of stock options grants that vest annually: each
option shall vest as to the next annual installment of shares, if any, together
with prorated additional vesting of a portion of any other unvested shares
covered by the option calculated by (x) subtracting the number of full months
remaining until the next normal annual vesting date of the option from 12, (y)
dividing the difference by 12 and multiplying the resulting fraction times the
number of shares, if any, covered by the next annual installment which will vest
upon the Effective Time of the Merger (each as defined in the Merger Agreement).
(ii) in the case of stock options that vest quarterly: each option
shall vest as to the next four unvested quarterly installments, if any, together
with prorated additional vesting of a portion of any other unvested shares
covered by the option calculated by (x) subtracting the number of full months
remaining until the normal quarterly vesting date of the option from 3, (y)
dividing the difference by 3 and multiplying the resulting fraction times the
number of shares, if any, covered by the next
1
<PAGE>
quarterly installment which will vest upon the Effective Time of the Merger
(each as defined in the Merger Agreement).
The remaining unvested shares of common stock subject to options held
by the Employee and described in the Agreements shall terminate in accordance
with the Agreements and the terms of the Company's stock incentive plan.
2. The Employee hereby represents and warrants to the Company and
CMGI that attached hereto as Schedule 1 is a true and complete statement of the
----------
Employee's ownership of capital stock and other equity securities of the Company
as of the date hereof, including a specific statement as to the aggregate number
of options which shall vest as of the Effective Time of the Merger (each as
defined in the Merger Agreement) after giving effect to paragraph one (1)
hereof, but without giving effect to the conversion of securities as described
in the Merger Agreement.
3. To the extent that the Employee had any oral or other written
agreement or understanding with the Company with respect to the vesting of
options, the vesting terms described in paragraph one (1) hereof shall
automatically supersede such agreement or understanding, and upon execution of
this Amendment by the Employee and the Company, such prior agreement or
understanding with respect to the vesting of options automatically shall be
deemed to have been terminated and shall be null and void.
4. In all other respects, the Agreements shall remain in full force
and effect.
2
<PAGE>
In witness whereof, the parties hereto have executed this Amendment as of the
first date written above.
UBID, INC.
By:______________________________________
Title:___________________________________
CMGI, INC.
By:______________________________________
Title:___________________________________
EMPLOYEE:
_________________________________________
Name:____________________________________
3
<PAGE>
SCHEDULE TO OPTION AMENDMENT
The following individuals entered into the foregoing agreement with uBid and
CMGI:
Gregory K. Jones
Joel D. Ludvigsen
Jason Maclean
Paul Stolarski
Timothy Takesue
4
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EXHIBIT 10.21
SUBLEASE AGREEMENT
------------------
THIS SUBLEASE AGREEMENT (this "Sublease"), dated as of December 1, 1999, is
made by and between CREATIVE COMPUTERS, INC., a Delaware corporation
("Sublessor") and uBID, INC., a Delaware corporation ("Sublessee").
1. Premises. Sublessor hereby subleases to Sublessee and Sublessee hereby
--------
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain improved space (the "Subleased
Premises") consisting of approximately seventy thousand (70,000) rentable square
feet, situated in that certain industrial building (the "Building") located at
4715 East Shelby Drive, Memphis, Tennessee 38118. A depiction of the Subleased
Premises is attached hereto as Exhibit "A."
----------
2. Master Lease. Sublessor is the lessee of the Subleased Premises and other
------------
additional office space by virtue of that certain Industrial Lease Agreement
dated September 15, 1995 (the "Master Lease"), between Mercy Capital Center
Joint Venture, successor in interest to Corporate Estates, Inc., a California
corporation ("Master Landlord") and Sublessor, as lessee, a copy of which is
attached hereto as Exhibit "B." Additionally, the parties acknowledge and agree
----------
that the Master Lease is subject to that certain Payment in Lieu of Taxes Lease
between the Industrial Development Board of the City of Memphis and the County
of Shelby, Tennessee ("IDB"), as landlord, and Master Landlord, as tenant.
Capitalized terms not otherwise defined herein shall have the meaning ascribed
to such terms in the Master Lease. Sublessor hereby represents and warrants to
Sublessee that Sublessor is not in default under the Master Lease nor is
Sublessor aware of any default of Master Landlord under the Master Lease.
3. Term.
----
3.1 Term. The term (the "Term") of this Sublease shall commence on the
----
"Commencement Date" (as defined below) and expire on the date that the last
business day of the calendar month twenty-two (22) months following the
Commencement Date, unless sooner terminated pursuant to any provision hereof.
The parties acknowledge and agree that the Commencement Date shall occur on the
later of (i) the date that Sublessor delivers written notice to Sublessee that
"Substantial Completion" of the Tenant Improvements (as defined and pursuant to
Section 8, below) has occurred, or (ii) the date the parties obtain Master
- ---------
Landlord's consent pursuant to Section 6 below.
---------
3.2 Early Occupancy. In the event that Sublessee occupies the Subleased
---------------
Premises for business purposes prior to the Commencement Date, such occupancy
shall be subject to all provisions hereof, and such occupancy shall not advance
the termination date.
4. Rent.
----
4.1 Basic Rent. Sublessee shall pay to Sublessor monthly in advance, on
----------
the first (1st) day of each month during the Term, rent (the "Basic Rent") for
the Subleased Premises in an amount equal to (a) Sixteen Thousand Six Hundred
Twenty-Five and No/100 Dollars ($16,625.00), less (b) the Amortized Tenant
Improvement Cost (as defined below). The Amortized Tenant Improvement Cost is
equal to the quotient of (i) the actual incurred Tenant Improvement Costs (as
defined in Section 8(a) below), divided by (ii) twenty-two (22). Rent for any
------------
period during the Term hereof which is for less than one (1) month shall be a
prorata portion of the monthly installment. Rent shall be payable in lawful
money of the United States to Sublessor at the address stated herein or to such
other persons or at such other places as Sublessor may designate in writing.
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4.2 Additional Rent.
---------------
(a) Sublessee shall pay to Sublessor as additional rent for the
Subleased Premises Sublessee's proportionate share ("Sublessee's Proportionate
Share") of Tenant's proportionate share of all Additional Rent and "operating
expenses" (as defined and pursuant to Section 6 of the Master Lease) and real
estate taxes and other impositions. Sublessee's Proportionate Share shall be
equal to the fraction, the numerator consisting of the then existing rentable
square feet of the Subleased Premises and the denominator consisting of 325,000.
Sublessee shall pay Sublessor's Proportionate Share of Additional Rent to
Sublessor within ten (10) days of invoice.
(b) In addition, to the extent that during the term hereof, Sublessee
requires extraordinary services or any resource in excess of that customarily
supplied to Sublessor's other premises under the Master Lease, Sublessee shall
contract, at Sublessee's sole costs and expense, with Master Landlord for such
services. Sublessor and Sublessee acknowledge and agree that Sublessee shall
not be required to pay any additional charge for basic services Master Landlord
is required to so provide without additional charge to Sublessor pursuant to
Section 6 of the Master Lease.
4.3 Payment of Rent and Consent to Sublease. Notwithstanding anything to
---------------------------------------
the contrary contained herein, Basic Rent and Additional Rent shall be payable
in the amounts and at the times set forth in this Section 4 regardless of the
---------
date that the parties hereto receive Master Landlord's consent to this Sublease
pursuant to Section 6 below. In the event, however, Master Landlord denies or
---------
fails to consent to this Sublease prior to the expiration of the Approval Period
(as defined in Section 6 below), Sublessee shall be entitled to the prompt
---------
return of all rent paid applicable to the period following the date Master
Landlord denied the approval of this Sublease and this Sublease shall be of no
further force or effect and the parties hereto shall have no further obligation
to each other.
5. Use. The Subleased Premises shall be used and occupied for office,
---
warehouse and distribution of computers and related equipment and other uses
related to Sublessee's business any other uses permitted under the Master Lease.
Sublessee's business shall be conducted throughout the term hereof so as not to
violate any term, provision or condition of the Master Lease. Sublessee shall
comply with all applicable statutes, ordinances, rules, regulations, orders,
restrictions of record and requirements in effect during the term hereof
regulating the use by Sublessee of the Subleased Premises; provided however,
Sublessee shall not be responsible for violations of applicable law relating to
the Subleased Premises occurring prior to Sublessee's occupancy of the Subleased
Premises.
6. Consent of Master Landlord. The parties hereto acknowledge that the Master
--------------------------
Lease requires that Sublessor obtain the consent of Master Landlord to any
subletting of the Subleased Premises. Therefore Sublessor and Sublessee agree
that this Sublease shall be terminated pursuant to Section 31 below unless,
----------
within thirty (30) days of the date hereof (the "Approval Period"), Master
Landlord grants its express consent to the terms and conditions of this
Sublease.
7. Environmental Matters.
---------------------
(a) For purposes of this Sublease:
(i) "Contamination" as used herein means the uncontained or
uncontrolled presence of or release of Hazardous Substances (as hereinafter
defined) into any environmental media from, upon, within, below, into or on any
portion of the Subleased Premises or the Building so as to require remediation,
cleanup or investigation under any applicable Environmental Law (as hereinafter
defined).
(ii) "Environmental Laws" as used herein means all federal, state, and
local laws, regulations, orders, permits, ordinances or other requirements,
concerning Hazardous Substances, and the protection of human health, safety and
the environment, all as may be amended from time to time.
2
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(iii) "Hazardous Substances" as used herein means any hazardous or
toxic substance, material, chemical, pollutant, contaminant or waste as those
terms are defined by any applicable Environmental Laws (including, without
limitation, the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. 9601 et seq. ("CERCLA") and the Resource Conservation and
Recovery Act, 42 U.S.C. 6901 et seq. ("RCRA") and any solid wastes,
polychlorinated biphenyls, urea formaldehyde, asbestos, radioactive materials,
radon, explosives, petroleum products and oil.
(b) Sublessee represents that all its activities on the Subleased Premises
or the Building during the course of this Sublease will be conducted in
compliance with Environmental Laws. Sublessee warrants that at its warehouse
facilities (i) to Sublessee's actual knowledge, is currently in compliance with
all applicable Environmental Laws and (ii) that there are no pending or
threatened notices of deficiency, notices of violation, orders, or judicial or
administrative actions involving alleged violations by Sublessee of any
Environmental Laws. Sublessee, at Sublessee's sole cost and expense, shall be
responsible for obtaining all permits or licenses or approvals under
Environmental Laws for Sublessee's operation of its business on the Subleased
Premises and shall make all notifications and registrations required by any
applicable Environmental Laws. Sublessee, at Sublessee's sole cost and expense
shall at all times comply with the terms and conditions of all such permits,
licenses, approvals, notifications and registrations with any other applicable
Environmental Laws. Sublessee warrants that it will apply for all such permits,
licenses or approvals and made all such notifications and registrations required
by any applicable Environmental Laws necessary for Sublessee's operation of its
business on the Subleased Premises prior to the Commencement Date and will
obtain prior to the Commencement Date or as soon thereafter as reasonably
possible all such permits, licenses or approvals.
(c) Sublessee shall not cause or permit any Hazardous Substances to be
brought upon, kept or used in or about the Subleased Premises or the Building
without the prior written consent of Sublessor, which consent shall not be
unreasonably withheld; provided, however, that the consent of Sublessor shall
-------- -------
not be required for the use at the Subleased Premises of cleaning supplies,
toner for photocopying machines and other similar materials, in containers and
quantities reasonably necessary for and consistent with normal and ordinary use
by Sublessee, at the Subleased Premises, in the routine operation or maintenance
of Sublessee's office equipment or in the routine janitorial service, cleaning
and maintenance for the Subleased Premises. For purposes of this Section 7,
---------
Sublessor shall be deemed to have reasonably withheld consent if Sublessor
determines that the presence of such Hazardous Substance within the Subleased
Premises could result in a risk of harm to person or property or otherwise
negatively affect the value or marketability of the Building.
(d) Sublessee shall not cause or permit the release of any Hazardous
Substances by Sublessee or its agents, contractors, employees or invitees into
any environmental media such as air, water or land, or into or on the Subleased
Premises or the Building in any manner that violates any Environmental Laws. If
such release shall occur, Sublessee shall (i) take all steps reasonably
necessary to contain and control such release and any associated Contamination,
(ii) clean up or otherwise remedy such release and any associated Contamination
to the extent required by, and take any and all other actions required under,
applicable Environmental Laws, and (iii) notify and keep Sublessor and Master
Landlord reasonably informed of such release and response.
(e) Sublessee shall under no circumstances whatsoever (i) cause or permit
any activity on the Subleased Premises which would cause the Subleased Premises
to become subject to regulation as a hazardous waste treatment, storage or under
RCRA or the regulations promulgated thereunder; (ii) discharge Hazardous
Substances into the storm sewer system serving the Building; or (iii) install
any storage tank or underground piping on or under the Subleased Premises.
(f) Sublessee shall and hereby does indemnify Sublessor and Master Landlord
and hold Sublessor and Master Landlord harmless from and against any and all
expense, loss, and liability suffered by Sublessor or Master Landlord (with the
exception of those expenses, losses, and liabilities arising from Sublessor's or
Master Landlord's own negligence or willful act), by reason of Sublessee's
improper storage, generation, handling, treatment, transportation, disposal, or
arrangement for transportation or disposal, of
3
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any Hazardous Substances (whether accidental, intentional, or negligent) or by
reason of Sublessee's breach of any of the provisions of this Section 7. Such
---------
expenses, losses and liabilities shall include, without limitation, (i) any and
all expenses that Sublessor or Master Landlord may incur to comply with any
Environmental Laws as a result of Sublessee's failure to comply therewith; (ii)
any and all costs that Sublessor or Master Landlord may incur in studying or
remedying any Contamination at or arising from the Subleased Premises or the
Building; (iii) any and all costs that Sublessor or Master Landlord may incur in
studying, removing, disposing or otherwise addressing any Hazardous Substances;
(iv) any and all fines, penalties or other sanctions assessed upon Sublessor or
Master Landlord by reason of Sublessee's failure to comply with Environmental
Laws; and (v) any and all legal and professional fees and costs incurred by
Sublessor or Master Landlord in connection with the foregoing. The indemnity
contained herein shall survive the termination or expiration of this Sublease.
(g) Sublessor and Master Landlord shall have the right, but not the
obligation, to enter the Subleased Premises at reasonable times throughout the
Term upon two (2) business days prior notice, except in the event of any
emergency, to audit and inspect the Subleased Premises for Sublessee's
compliance with this Section 7.
---------
8. Tenant Improvements; Condition of Premises and Alterations.
----------------------------------------------------------
(a) Sublessor shall, at Sublessee's sole cost and expense, acquire,
construct and install the tenant improvements (the "Tenant Improvements") as set
forth on Exhibit "C" attached hereto. Upon the execution of this Sublease,
-----------
Sublessee shall deliver to Sublessor, in cash or immediately available funds,
Three Hundred Ninety Thousand One Hundred Ninety-Five and No/100 Dollars
($390,195.00) (the "Tenant Improvement Allowance") to be used by Sublessor to
pay for the Tenant Improvements. In the event that the cost for the acquisition,
installation and construction of the Tenant Improvements (the "Tenant
Improvement Costs") is less than the Tenant Improvement Allowance, Sublessor
shall return the balance of the Tenant Improvement Allowance to Sublessee, and
the parties hereto agree that Basic Rent shall be adjusted as set forth in
Section 4.1. In the event that the Tenant Improvement Costs exceed the Tenant
- -----------
Improvement Allowance, Sublessee shall pay the cost of such overage up to
Twenty-Five Thousand and no/100 Dollars ($25,000.00) (the "Additional
Allowance"). In the event that the Tenant Improvement Costs exceed the sum of
Tenant Improvement Allowance and the Additional Allowance, Sublessor shall pay
such overage. Sublessor shall deliver written notice to Sublessee upon the
occurrence of and evidencing the substantial completion ("Substantial
Completion") of the acquisition, construction and installation of the Tenant
Improvements, subject to minor punch list items.
(b) In the event that Sublessee requests in writing a revision in any plans
approved by Sublessee relating to the Tenant Improvements or otherwise requests
any change to the Tenant Improvements as contemplated in this Sublease, then
provided such requested change is acceptable to Sublessor, in Sublessor's
reasonable discretion, Sublessor shall advise Sublessee by written change order
of any additional cost such change would cause. Sublessee shall approve or
disapprove such change order in writing within five (5) days following its
receipt. Sublessee's approval of a change order shall not be effective unless
accompanied by payment in full of the additional cost, if any, of the tenant
improvement work resulting from the change order. It is understood that
Sublessor shall have no obligation to interrupt or modify the construction and
installation of the Tenant Improvement work pending Sublessee's approval of a
change order.
(c) Except as otherwise set forth in Section 8(a) and Section 8(b) above,
------------ ------------
the Subleased Premises sublet hereunder shall be taken and leased by Sublessee
in their "as is" condition existing as of the date hereof. Except for non-
structural alterations costing less than Ten Thousand and No/100 Dollars
($10,000.00), Sublessee shall not make or suffer to be made any alterations,
additions or improvements to or of the Subleased Premises or any part thereof
without first obtaining the prior written consent of Master Landlord and
Sublessor. Sublessor agrees that Sublessor's consent to such alterations,
additions or improvements shall not be unreasonably withheld or delayed. In the
event Sublessor consents to the making of any alterations, additions or
improvements to the Subleased Premises by Sublessee the same shall be made by
Sublessee at Sublessee's sole cost and expense. All alterations, additions and
improvements made by Sublessee pursuant to this Sublease shall at the expiration
of the Term hereof
4
<PAGE>
become the property of Sublessor without any additional consideration. Upon the
expiration or sooner termination of the Term hereof, Sublessee shall, upon
written demand by Sublessor given at least thirty (30) days prior to the end of
the term, at Sublessee's sole cost and expense, forthwith and with all due
diligence remove any alterations, additions, or improvements made by Sublessee,
designated by Sublessor to be removed and further, Sublessee shall, forthwith
and with all due diligence at its sole cost and expense, repair any damage to
the Subleased Premises caused by such removal. In all events, Sublessee shall
maintain the Subleased Premises in good condition and repair and shall surrender
the Subleased Premises to Sublessor upon expiration of this Sublease, or the
sooner termination thereof, in good condition and repair, excluding ordinary
wear and tear.
9. Liens. Sublessee shall keep the Subleased Premises and all alterations,
-----
additions and improvements thereto, free from any liens arising out of any work
performed or obligations incurred by or for Sublessee or materials furnished to
Sublessee. Sublessor shall have the right to post notices of no responsibility
with respect to any work performed or obligations incurred by or for Sublessee
or materials furnished to Sublessee. If Sublessee fails to keep the Subleased
Premises free from any such liens and does not, within ten (10) days following
the imposition of any such lien, cause the same to be released of record by
payment or posting of a proper bond, Sublessor shall have, in addition to all
other remedies provided herein and by law, the right but not the obligation, to
cause the same to be released by such means as it shall deem proper, including
payment of or defense against the claim giving rise to such lien. All sums paid
by Sublessor and all expenses incurred by it in connection therewith (including,
without limitation, reasonable attorneys, fees) shall create automatically an
obligation of Sublessee to pay an equivalent amount as Additional Rent, which
Additional Rent shall be payable by Sublessee on Sublessor's demand with
interest at the maximum rate per annum permitted by law until paid. Such
interest charged shall not constitute Sublessor's exclusive remedy nor
compromise or limit any other rights granted Sublessor by this Sublease or by
law or equity. Nothing herein shall imply any consent by Sublessor to subject
Sublessor's estate to liability under any mechanic's lien law. Sublessee may
contest the validity and/or amount of any lien imposed on the Subleased
Premises, provided that Sublessee has caused such lien to be released of record
by the payment or posting of the proper bond.
10. Repairs. Sublessee shall promptly make all repairs to the Subleased
-------
Premises not required to be made by Master Landlord pursuant to the Master
Lease, including, but not limited to special items and equipment installed by or
on behalf of Sublessee. Sublessee shall pay for any repairs to the Subleased
Premises or the Building made necessary by any act, neglect, misuse or omission
of duty by Sublessee or its assignees, subtenants, employees, invitees or their
respective agents or other persons permitted in the Subleased Premises or on any
other portion of the Building by Sublessee, or any of them, and will maintain
the Subleased Premises, and will leave the Subleased Premises upon termination
of this Sublease, in a safe, clean, neat and sanitary condition. If Sublessee
fails to maintain the Subleased Premises in good order, condition and repair,
Sublessor shall give Sublessee notice to do such acts as are reasonably required
to so maintain the Subleased Premises. If Sublessee fails to promptly commence
such work and diligently prosecute it to completion, Sublessor shall have the
right to do such acts and expend such funds at the expense of Sublessee as are
reasonably required to perform such work. Prior to commencing any item of
repair or maintenance work which is connected to the Building or may affect any
structural portion of the Building or any of its basic systems (including,
without limitation, air conditioning, heating, plumbing, electrical, and light
fixtures), Sublessee shall notify Master Landlord and Sublessor and obtain
Master Landlord's and Sublessor's prior written approval of the contractor who
will perform such work. Master Landlord or Sublessor may elect to perform the
required work at Sublessee's cost. All amounts payable by Sublessee to
Sublessor pursuant to this Section 10 shall be paid as Additional Rent within
----------
ten (10) days after Sublessor delivers to Sublessee invoices or cancelled checks
evidencing such payment obligations. Notwithstanding the foregoing, the parties
hereto acknowledge and agree that Master Landlord shall remain responsible for
the performance of all repairs expressly required to be performed by Master
Landlord pursuant to the terms and conditions of the Master Lease ("Landlord's
Repair Obligations"). Sublessee shall notify both Master Landlord and Sublessor
in the event that Master Landlord shall fail to perform Landlord's Repair
Obligations. Upon such notification and in addition to such other rights and
remedies Sublessor shall have under the Master Lease, Sublessor shall either (i)
take reasonable action under the Master Lease to require Master Landlord to
perform its obligations thereunder, or (ii) permit Sublessee,
5
<PAGE>
with Sublessor's reasonable cooperation, to enforce Master Landlord's repair
obligations under the Master Lease.
11. Damage or Destruction. In the event of damage or destruction to the
---------------------
Building or any part thereof, the Master Lease shall either continue or
terminate pursuant to Section 20 of the Master Lease. If the Master Lease
----------
terminates, the Sublease shall also terminate. If the Master Lease does not
terminate, then Master Landlord shall commence the necessary repair or
restoration of the Building, including that portion of the Subleased Premises,
if any, suffering damage or destruction, as required under the Master Lease.
Sublessor shall have no responsibility whatsoever for the repair or restoration
of the Subleased Premises, it being acknowledged by Sublessee that any repairs
must be performed, if at all, by Master Landlord. There shall be no reduction
or abatement of rent for any period during which Sublessee is unable to use the
Subleased Premises, in whole or in part, due to the repairs or restoration
required under this paragraph, unless Sublessor actually receives a reduction or
abatement in rent under the terms of the Master Lease and then, only to the
extent such reduction or abatement relates to the Subleased Premises. In any
event Sublessee shall not be entitled to any insurance proceeds or other
remuneration except for insurance proceeds from insurance policies it purchased
for its own personal property.
12. Eminent Domain or Condemnation. In the event a proceeding in eminent
------------------------------
domain or condemnation is instituted against the Building, or any part thereof,
the Master Lease shall either continue or terminate pursuant to Section 21 of
----------
the Master Lease. If the Master Lease terminates, this Sublease shall also
terminate. If the Master Lease does not terminate and the Subleased Premises
have not been materially affected, then the Sublease shall continue in full
force and effect except that the rental payable hereunder shall be reduced to
the extent that rent applicable to the Subleased Premises is equitably reduced
under the Master Lease. If the Master Lease does not terminate and the
Subleased Premises are materially and substantially affected by the proceeding
in eminent domain or condemnation, then Sublessee shall have the right to
terminate the Sublease. In any event, Sublessee shall not be entitled to any
award of damages for Sublessee's interest in the Subleased Premises.
Notwithstanding the foregoing, nothing contained herein shall prevent Sublessee
from seeking an award against a taking authority for the taking of personal
property and fixtures owned by Sublessee or for moving expenses as a result of
such taking; provided however, the award sought and received by Sublessee shall
not diminish or affect, in whole or in part the award sought by Master Landlord
or Sublessor.
13. Waiver of Liability; Indemnification. Without limiting in any way the
------------------------------------
effect or generality of all indemnification and waiver provisions contained as
part of the terms of the Master Lease, which are incorporated herein pursuant to
Section 15 below, Sublessee hereby agrees that:
- ----------
(a) Sublessor shall not be liable to Sublessee, and Sublessee hereby waives
all claims against Sublessor, for any injury or damage to any person or property
in or about the Subleased Premises by or from any cause whatsoever other than by
reason of the negligent acts or willful misconduct of Sublessor.
(b) Sublessee shall defend, indemnify and hold Sublessor and Master
Landlord harmless against any and all claims or liability for any injury or
damage to any person or property whatsoever when such injury or damage shall be
caused in part or in whole by the act, neglect, fault of, or omission of any
duty with respect to the same, by Sublessee, its agents, servants, employees, or
invitees: (i) occurring in, on, or about the Subleased Premises or any part
thereof, and (ii) occurring in, on, or about any facilities (including, without
prejudice to the generality of the term "facilities," elevators, stairways,
passageways or hallways) the use of which Sublessee may have in conjunction with
other tenants of the Building.
(c) Sublessee and Sublessor each hereby, on behalf of itself and all
persons and parties claiming under or through it, including without limitation
its insurance carrier(s), waives any right of recovery or claim against the
other for any damage to or destruction of any property located in or about the
Subleased Premises which results from or arises out of any casualty or event
insured by any casualty and/or property insurance policy carried by such waiving
party, regardless of the cause or origin of such casualty or event, including
without limitation, the negligence of Sublessee or Sublessor.
14. Assignment and Subletting.
-------------------------
6
<PAGE>
(a) Sublessee shall not sell, assign, encumber or otherwise transfer by
operation of law or otherwise this Sublease or any interest herein, sub-sublet
the Subleased Premises, or suffer any other person to occupy or use the
Subleased Premises or any portion thereof, without the prior written consent of
Sublessor and Master Landlord as provided herein, nor shall Sublessee permit any
lien to be placed on the Sublessee's interest by operation of law or otherwise.
Sublessee shall, by written notice, advise Sublessor of its desire from and
after a stated date (which shall not be less than ten (10) days nor more than
ninety (90) days after the date of Sublessee's notice), to subsublet the
Subleased Premises or any portion thereof for any part of the term hereof. Said
notice by Sublessee shall state the name and address of the proposed sub-
subtenant, together with such proposed sub-subtenant's certified financial
statements, and Sublessee shall deliver to Sublessor a true and complete copy of
the proposed subsublease with said notice. Sublessor shall not unreasonably
withhold its own consent to such sub-sublease, provided Master Landlord shall
also give its consent.
(b) Any sub-subletting hereunder by Sublessee shall not result in Sublessee
being released or discharged from any liability under this Sublease. Any
consent by Sublessor to any sub-subletting of the Subleased Premises or any part
thereof by Sublessee shall not be deemed to be a consent to any other sub-
subletting of the Subleased Premises and shall not constitute a waiver of the
requirements of Sublessor's consent to any other subsubletting of the Subleased
Premises as such requirement is stated herein. Any sale, assignment,
encumbrance, subsubletting, occupation, lien or other transfer of this Sublease
which does not comply with the provisions of this paragraph shall be voidable
and at Sublessor's election shall constitute a default hereunder.
(c) Sublessee shall pay to Sublessor of all rent received by Sublessee from
any sub-subletting hereunder in excess of the rent payable by Sublessee to
Sublessor under this Sublease, and any sums paid to Sublessee by any assignee
hereunder in consideration of the assignment of this Sublease. Sublessee hereby
irrevocably assigns to Sublessor, as security for Sublessee's obligations under
this Sublease, all rent from any sub-subletting provided, however, that until
the occurrence of an event of default by Sublessee hereunder, Sublessee shall
have the right to collect such rent.
15. Incorporation of Terms of Master Lease. It is expressly understood,
--------------------------------------
acknowledged and agreed by Sublessee that all of the other terms, conditions and
covenants of this Sublease shall be those stated in the Master Lease but only to
the extent that the terms of the Master Lease relate to the Subleased Premises,
except for (i) the basic rent obligations set forth in Article 4 of the Master
Lease, (ii) the Additional Rent obligations set forth in Article 6 of the Master
Lease, subject however to Section 4 above and (iii) Articles 16 through 18,
---------
inclusive, 35 through 37, inclusive, 39 and 40 of the Master Lease. Sublessee
shall and hereby agrees to be subject to and bound by and to comply with the
Master Lease with respect to the Subleased Premises and to satisfy all
applicable terms and conditions of the Master Lease for the benefit of both
Sublessor and Master Landlord, and that upon the breach of any of said terms,
conditions or covenants of the Master Lease by Sublessee or upon the failure of
the Sublessee to pay rent or comply with any of the provisions of this Sublease,
Sublessor may exercise any and all rights and remedies granted to Master
Landlord by the Master Lease, as well as any and all rights and remedies granted
to Sublessor by this Sublease. It is further understood and agreed that the
Sublessor has no duty or obligation to the Sublessee under the Master Lease
other than to maintain the Master Lease in full force and effect during the term
of this Sublease, provided, however, that Sublessor shall not be liable to
Sublessee for any earlier termination of the Master Lease which is not due to
the fault of Sublessor. Whenever the provisions of the Master Lease which have
been incorporated as provisions of this Sublease require the written consent of
the Master Landlord, said provisions shall be construed to require the written
consent of both the Master Landlord and the Sublessor. Sublessor hereby
covenants that its consent shall not be unreasonably withheld or delayed.
Sublessee hereby acknowledges that it has read and is familiar with the terms of
the Master Lease, and agrees that this Sublease is subordinate and subject to
the Master Lease and that any termination thereof shall likewise terminate this
Sublease. Sublessee further agrees that, in executing this Sublease and
assuming the obligations of lessee under the Master Lease (to the extent
applicable), it has not been granted any of the rights of Sublessor, as lessee
under the Master Lease, such rights being specifically reserved by Sublessor,
except to the extent granted to Sublessee hereunder. In the event of any
inconsistencies between any of the provisions of this Sublease and the Master
Lease, the terms of this Sublease shall govern.
7
<PAGE>
16. Personal Property Taxes. Sublessee shall pay or cause to be paid, before
-----------------------
delinquency, any and all taxes levied or assessed and which become payable
during the term hereof upon all Sublessee's leasehold improvements, equipment,
furniture, fixtures and personal property located in the Subleased Premises.
17. Default and Remedies.
--------------------
(a) The occurrence of any one or more of the following events shall
constitute a material default and breach of this Sublease by Sublessee:
(i) The failure by Sublessee to make any payment of rent or any other
payment required to be made by Sublessee hereunder, as and when due, where such
failure shall continue for a period of three (3) days after written notice
thereof by Sublessor to Sublessee;
(ii) The abandonment (but not vacation of the Subleased Premises
provided Sublessee continue to timely pay all rent due hereunder) of the
Subleased Premises by Sublessee;
(iii) The failure by Sublessee to observe or perform any of the
covenants, conditions or provisions of this Sublease to be observed or performed
by Sublessee, where such failure shall continue for a period of twenty (20) days
after written notice thereof by Sublessor to Sublessee. If the nature of such
default is such that the same cannot be reasonably cured within such twenty (20)
day period, Sublessee shall not be deemed to be in default hereunder if
Sublessee shall within such period commence such cure and thereafter diligently
prosecute the same to completion, provided Master Landlord has not declared a
material default and breach of the Master Lease as a result of Sublessee's
failure to cure such default;
(iv) The making by Sublessee of any general assignment or general
arrangement for the benefit of creditors; or the filing by or against Sublessee
of a petition to have Sublessee adjudged a bankrupt, or a petition for
reorganization or arrangement under any law, now existing or hereafter amended
or enacted, relating to bankruptcy or insolvency (unless, in the case of a
petition filed against Sublessee, Sublessee has not consented to, or admitted
the material allegation of said petition is dismissed within thirty (30) days);
or the appointment of a trustee or a receiver (other than in a bankruptcy or
insolvency proceeding) to take possession of substantially all of Sublessee's
assets located at the Subleased Premises or of Sublessee's interest in this
Sublease, where possession is not restored to Sublessee within thirty (30) days;
or
(v) Sublessee causes a material default and breach under the Master
Lease.
(b) In the event of any such material default or breach by Sublessee,
Sublessor may, at any time thereafter, with or without notice or demand, and
without limiting Sublessor in the exercise of any right or remedy which
Sublessor may have hereunder, under the Master Lease as incorporated herein or
otherwise at law or in equity by reason of such default or breach, including,
but not limited to:
(i) Terminate this Sublease and Sublessee's right to possession of the
Subleased Premises by notice to Sublessee or any other lawful means, in which
case this Sublease shall terminate and Sublessee shall immediately surrender
possession of the Subleased Premises to Sublessor. In such event Sublessor
shall be entitled to recover from Sublessee all unpaid installments of rent and
other sums due and owing under this Sublease as of the date of Sublessee's
default and all damages incurred by Sublessor by reason of Sublessee's default,
including, but not limited to:
(A) The cost of recovering possession of the Subleased Premises; or
(B) The worth at the time of award by the court having jurisdiction
thereof of the amount by which the unpaid rent for the balance of the term after
the time of such award exceeds the amount of such rental loss for the same
period that Sublessee proves could be reasonably avoided.
8
<PAGE>
Unpaid installments of rent or other sums shall bear interest from the date due
at the highest legal rate permissible in the State where the Subleased Premises
are located. In the event Sublessee shall have abandoned the Subleased
Premises, Sublessor shall have the option of (1) taking possession of the
Subleased Premises and recovering from Sublessee the amounts specified
hereinabove, or (2) proceeding under the provisions of the following paragraphs
(ii) and/or (iii).
(ii) Maintain Sublessee's right to possession, in which case this
Sublease shall continue in effect whether or not Sublessee shall have abandoned
the Subleased Premises. In such event Sublessor shall be entitled to enforce
all of Sublessor's rights and remedies under this Sublease, including, without
limitation, the right to recover the rent as it becomes due hereunder.
Notwithstanding any election by Sublessor not to terminate this Sublease or
Sublessee's right to possession, and whether or not Sublessor has sublet the
Subleased Premises or any part thereof as provided hereinabove, Sublessor shall
retain the right to and may at any time thereafter elect to terminate this
Sublease or Sublessee's right to possession for any default of Sublessee which
remains uncured or for any subsequent default of Sublessee by giving Sublessee
written notice thereof.
(iii) Pursue any other remedy now or thereafter available to
Sublessor under the laws or judicial decisions of the State in which the
Subleased Premises are located.
(c) No entry or taking of possession of the Subleased Premises or any part
thereof by Sublessor, nor any subletting thereof by Sublessor for Sublessee, nor
any appointment of a receiver, nor any other act of Sublessor, whether
acceptance of keys to the Subleased Premises or otherwise, shall constitute or
be construed as an election by Sublessor to terminate this Sublease or
Sublessee's right to possession of the Subleased Premises unless a written
notice of such election be given to Sublessee by Sublessor.
(d) In the event Sublessor elects to terminate this Sublease or Sublessee's
right to possession hereunder, Sublessee shall surrender and vacate the
Subleased Premises in broom-clean condition, and Sublessor may re-enter and take
possession of the Subleased Premises and may eject all parties in possession or
eject some and not others or eject none. Any personal property of or under the
control of Sublessee remaining on the Subleased Premises at the time of such re-
entry may be considered and treated by Sublessor as abandoned.
(e) Termination of this Sublease or Sublessee's right to possession by
Sublessor shall not relieve Sublessee from any liability to Sublessor under any
provision of this Sublease providing for any indemnification of Sublessor by
Sublessee.
18. Brokers. Sublessee and Sublessor each represent and warrant to one another
-------
that no brokers brought about or had any connection with the procuring,
execution, or delivery of this Sublease, and each party hereto agrees to
indemnify and hold the other harmless against any claims by any broker for
services rendered to the indemnifying party in connection with this Sublease.
19. Insurance. Sublessee shall during the entire Term of this Sublease,
---------
maintain all insurance policies required by Sublessor to be maintained under the
Master Lease in accordance with the terms of the Master Lease to the extent
applicable to the Subleased Premises. Sublessee shall name Sublessor as an
additional insured on all such policies in which Master Landlord is also named
as an additional insured.
20. ADA Compliance. Sublessee shall, at its sole cost and expense, cause the
--------------
Subleased Premises to comply at all times with the requirements of the Americans
With Disabilities Act (42 U.S.C. (S) 12181 et seq.), the regulations now or
hereafter adopted pursuant thereto, and any and all applicable state or local
laws, statutes, ordinances, rules and regulations concerning public
accommodations for disabled persons now or hereafter in effect. Sublessee shall
indemnify, defend (with counsel approved by Sublessor) and hold Sublessor
harmless from and against any and all claims, judgments, damages, penalties,
fines, costs, liabilities and losses (including, without limitation, reasonable
attorneys' fees and disbursements) arising from Sublessee's failure to comply
with this Article.
9
<PAGE>
21. Systems. During the term of this Sublease, Sublessee shall have the right
-------
to use Sublessor's current inventory control and shipping systems ("Systems") to
the extent permitted under Sublessor's license ("Sublessor's Licensing
Agreement"). Sublessee acknowledges and agrees that its use of the Systems are
on an "AS-IS" basis. Sublessee shall not be required to pay any additional
amount to Sublessor for the use of Sublessor's License Agreement but may be
required to make payment for such use to the licensor thereunder. Sublessee
shall pay to Sublessor Sublessee's proportional share of all cost and expense
("Maintenance Costs") necessary for the maintenance and support of the Systems,
including, but not limited to Sublessor's cost for personnel to maintain the
Systems, in accordance with the schedule attached hereto as Exhibit "D." All
----------
Maintenance Costs shall be billed monthly with Basic Rent and shall be payable
within five (5) days of demand. All other additional costs incurred by
Sublessor as a result of Sublessee's use of the Systems, including but not
limited to additional licensing fees and upgrades in software, shall be
reimbursed by Sublessee, as additional rent, within five (5) days of demand by
Sublessor. Notwithstanding the foregoing, Sublessor shall have no liability
whatsoever to Sublessee for any error, act, omission, or failure associated with
the Systems or the use by Sublessee thereof, unless such error, act, omission or
failure is attributable to Sublessor's willful misconduct or gross negligence.
In addition, in no event shall Sublessee be entitled to any reduction in or
offset to Basic Rent or Additional Rent hereunder as a result of any such error,
act, omission or failure or in the event Sublessee elects at any time to
discontinue its use of the Systems. Notwithstanding anything to the contrary
contained in that certain Sublease Agreement dated July 1, 1998 (the "Prior
Sublease") between Sublessor and Sublessee, Sublessee acknowledges and agrees
that following June 30, 2000, either Sublessee or Sublessor shall have the right
upon thirty (30) days prior written notice to the other, to terminate
Sublessor's Licensing Agreement and (i) Sublessor shall have no liability
whatsoever to Sublessee as a result of the same under this Sublease or the Prior
Sublease, (ii) this Sublease shall continue in full force and effect, and (iii)
Sublessee shall not be entitled to any reduction in or offset to Basic Rent or
Additional Rent due hereunder as a result of such termination.
22. Notices. All notices and demands which may or are required to be given by
-------
either party to the other hereunder shall be in writing and shall be personally
delivered or sent by United States certified or registered mail, postage
prepaid, return receipt requested, or sent by reputable overnight courier (such
as Federal Express, UPS or DHL with delivery confirmation) and addressed as
follows:
TO SUBLESSOR: CREATIVE COMPUTERS, INC.
2555 West 190th Street
Torrance, California 90504
Attn: Chief Financial Officer
With a copy to: MORRISON & FOERSTER LLP
19900 MacArthur Boulevard
Suite 1200
Irvine, California 92612
Attention: William B. Tate II, Esq.
TO SUBLESSEE: uBID, INC.
2525 Busse Highway
Elk Grove Village, Illinois 60007
Attn: Chief Financial Officer
With a copy to: WINSTON & STRAWN
35 West Wacker Drive
Chicago, Illinois 60601-9703
Attention: Helen Shapiro, Esq.
All notices shall be deemed to have been received at the time of delivery, if
personally delivered, or three (3) business days after deposit in the United
States mail as specified above, if mailed or one (1) business day if sent by
overnight courier for next business day delivery. Either party may from time to
time change the address for delivery of notices and demands by giving notice of
such change as specified above.
10
<PAGE>
Sublessor shall promptly provide Sublessee with a copy of any notice of default
under the Master Lease and any notice relating to the Subleased Premises
received by Sublessor from Master Landlord. Sublessee shall forward concurrently
to Sublessor any notices sent or received from Master Landlord relating to the
Subleased Premises.
23. Hold Over. In the event of any holding over without the consent of
---------
Sublessor beyond the end of the term, this Sublease shall be deemed a tenant at
sufferance upon the covenants and conditions herein contained and upon payment
of (i) 150% the monthly rental last paid by Sublessee and (ii) prompt
reimbursement to Sublessor of all loss, cost, expense and consequential damages
incurred by Sublessor as a result of such continued tenancy.
24. Captions. The captions of sections of this Sublease are not a part of this
--------
Sublease and shall have no effect upon the construction or interpretation of any
part hereof.
25. Successors and Assigns. The covenants and conditions herein contained,
----------------------
subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators, legal representatives and assigns of the
parties hereto.
26. Attorneys' Fees. In the event of any legal action or proceeding brought by
---------------
either party against the other arising out of this Sublease (an "Action"), the
prevailing party shall be entitled to the payment by the losing party of its
reasonable attorneys' fees, court costs and litigation expenses, as determined
by the court.
27. Post-Judgment Attorneys' Fees. The prevailing party in any Action shall be
-----------------------------
entitled, in addition to and separately from the amounts receivable under
Section 26 above, to the payment by the losing party of the prevailing party's
- ----------
reasonable attorneys' fees, court costs and litigation expenses incurred in
connection with (a) any appellate review of the judgment rendered in such Action
or of any other ruling in such Action, and (b) any proceeding to enforce a
judgment in such Action. It is the intent of the parties that the provisions of
this Section 27 be distinct and severable from the other rights of the parties
----------
under this Lease, shall survive the entry of judgment in any Action and shall
not be merged into such judgment.
28. Gender and Number. Wherever the context so requires, each gender shall
-----------------
include any other gender, and the singular number shall include the plural and
vice-versa.
29. Cumulative Remedies. No remedy or election hereunder shall be deemed
-------------------
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
30. Separability. Any provision of this Sublease which shall prove to be
------------
invalid, void or illegal shall. in no way affect, impair, or invalidate any
other provision hereof and all such other provisions shall remain in full force
and effect.
31. Effectiveness. This Sublease shall become effective when executed by all
-------------
the parties hereto. In the event Master Landlord and IDB, however fail to
expressly consent to the same within the Approval Period, this Sublease shall
terminate. Sublessor shall return to Sublessee the initial payment of Basic
Rent delivered to Sublessor concurrently with the execution hereof by Sublessee,
and the parties hereto shall have no further obligation or liability to the
other. This Sublease may be executed by telefacsimile.
32. Quiet Enjoyment. Upon Sublessee paying all Basic Rent, Additional Rent and
---------------
other charges due hereunder and observing and performing all of the covenants,
conditions and provisions to be performed by Sublessee hereunder, Sublessee
shall have quiet possession of the Subleased Premises for the entire term
hereof, subject to all of the provisions of this Sublease and the Master Lease.
33. Time of the Essence. Time is of the essence of each provision of this
-------------------
Sublease where time is an element.
11
<PAGE>
34. Counterparts. This Sublease may be executed in counterparts, each is
------------
hereby declared to be an original; all, however constitute but one and the same
agreement.
IN WITNESS WHEREOF, the parties have executed this Sublease on the date
first above written.
Executed at Torrance, CA CREATIVE COMPUTERS, INC.,
on December 1, 1999 a California corporation
By: /s/ TED SANDERS
-----------------------------------
Name: Ted Sanders
------------------------------
Title: Chief Financial Officer
-----------------------------
By: /s/ SCOTT KLEIN
-----------------------------------
Name: Scott Klein
------------------------------
Title: President
-----------------------------
"Sublessor" (Corporate Seal)
Executed at Chicago, IL uBID, INC., a Delaware corporation
on January 5, 2000
By: /s/ RHYTAS KLEIZA
-----------------------------------
Name: Rhytas Kleiza
------------------------------
Title: Director of Distribution
-----------------------------
By: /s/ TIMOTHY TAKESUE
-----------------------------------
Name: Timothy Takesue
------------------------------
Title: Vice President-Merchandising
-----------------------------
"Sublessee" (Corporate Seal)
12
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-69355 and 333-9419) pertaining to the 1998 Stock Incentive
Plan of uBid, Inc. and the Registration Statement (Form S-8 No. 333-93025)
pertaining to the Stock Option Agreement between uBid, Inc. and Kenneth Dotson,
of our report dated January 17, 2000, except for Note 9, as to which the date is
February 9, 2000, with respect to the financial statements and schedule of uBid,
Inc. included in the Annual Report (Form 10-K) for the year ended December 31,
1999.
/s/ Ernst & Young LLP
Chicago, Illinois
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 53,636
<SECURITIES> 0
<RECEIVABLES> 3,615
<ALLOWANCES> 0
<INVENTORY> 15,098
<CURRENT-ASSETS> 74,723
<PP&E> 4,543
<DEPRECIATION> 0
<TOTAL-ASSETS> 79,266
<CURRENT-LIABILITIES> 34,004
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 45,258
<TOTAL-LIABILITY-AND-EQUITY> 79,266
<SALES> 204,925
<TOTAL-REVENUES> 204,925
<CGS> 185,798
<TOTAL-COSTS> 185,798
<OTHER-EXPENSES> 45,827
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (25,495)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,495)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,495)
<EPS-BASIC> (2.61)
<EPS-DILUTED> (2.61)
</TABLE>
