<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 23, 2000.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
800.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
OREGON 5961 93-1237185
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1516 NW THURMAN
PORTLAND, OREGON 97209
(503) 944-3600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GREGORY L. DREW
CHIEF EXECUTIVE OFFICER
1516 NW THURMAN
PORTLAND, OREGON 97209
(503) 944-3600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
-------------------------
COPIES TO:
<TABLE>
<S> <C>
ROY W. TUCKER PETER T. HEALY
PERKINS COIE LLP O'MELVENY & MYERS LLP
1211 SW FIFTH AVENUE, 15TH FLOOR 275 BATTERY STREET, 26TH FLOOR
PORTLAND, OREGON 97204 SAN FRANCISCO, CA 94111
(503) 727-2000 (415) 984-8833
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING AMOUNT(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
Common Stock.................................. $60,000,000 $15,840
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) based on the estimate of the maximum aggregate
offering price.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
SUBJECT TO COMPLETION, DATED MARCH 23, 2000
[800.COM LOGO]
SHARES
COMMON STOCK
800.COM is offering shares of its common stock. This is our
initial public offering and no public market currently exists for our shares. We
have applied for approval for quotation of our common stock on the Nasdaq
National Market under the symbol "EHDC." We anticipate that the initial public
offering price will be between $ and $ per share.
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ----------
<S> <C> <C>
Public Offering Price....................................... $ [] $[ ]
Underwriting Discounts and Commissions...................... $ [] $[ ]
Proceeds to 800.COM......................................... $ [] $[ ]
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
800.COM has granted the underwriters a 30-day option to purchase up to an
additional shares of common stock to cover over-allotments.
-------------------------
ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL
SECURITIES
The date of this prospectus is , 2000.
<PAGE> 3
DESCRIPTION OF GRAPHICS
INSIDE FRONT COVER
The graphic features our logo in the upper left-hand corner. The 800.COM logo
consists of the words "800 dot COM" placed upon a background of a black oval
with the word "dot" encapsulated in a red circle. The words are surrounded by a
series of red, orange, and yellow halos. There are photographs of five products
we sell. Starting below the logo and moving clockwise, they are: a MP3 player, a
television, a portable compact disc player, a camera and a DVD player. The
bottom right-hand corner of the graphic reads "Electronics. And more."
GATEFOLD
Across the top is the text "800.COM is changing the way people shop for
electronics." Below this statement along the left side of the gatefold is the
text "At 800.COM we don't just sell electronics. We help people who want
electronics find the perfect equipment for their lives."
Below the text and also along the left side of the gatefold, is a partial
screen shot that lists departments within our online store. At the top of the
table is the heading "Video" with the following sub-headings: "Televisions,"
"DVD Players," "TiVo/Replay TV," "VCRs," "Camcorders," "DIRECTV Systems" and
"WebTV." The second heading is "Audio," with the following sub-headings:
"Systems," "Receivers," "Preamps/Processors," "Amplifiers," "Equalizers," "CD
Players," "Tape Decks," "Minidiscs" and "Speakers." The third heading is
"Digital Cameras" with the following sub-headings: "Digital Cameras" and
"Peripherals." The fourth heading is "Personal Electronics" with the following
sub-headings: "Boomboxes," "Personal Stereos," "Personal CD Players," "Radios,"
"MP3," "Clock Radios" and "Portable Minidiscs." The fifth heading is "Car
Audio," with the following sub-headings: "Car Audio Wizard," "Car CD Players,"
"Car Cassette Players," "Car CD Changers," "Car Amplifiers" and "Car Speakers."
The sixth heading is "Phones/Communication" with the following sub-headings:
"Cordless Phones," "Corded Phones," "Answering Machines/Caller ID" and "Two-Way
Radios."
Centered in the upper portion of the gatefold is a three row table. The first
row has the following titles: "BUYING CYCLE," "INTEREST," "INVESTIGATE,"
"REFERENCE," "SELECT," "ACQUIRE," "ACCEPT" and "REPURCHASE." The second row
reads from left to right as follows: "CUSTOMERS NEEDS," "WHAT'S NEWS," "EXPERT
ADVICE," "PEER ADVICE," "RETAILER ADVICE," "RIGHT PRODUCT," "RETAILER SUPPORT"
and "NO REMORSE." The third row reads from left to right as follows: "800.COM
DELIVERS," "Value-Added Promotions," "Industry Resources," "Community
Resources," "Pre-sales Support," "Direct Fulfillment," "Post-sales Support" and
"Loyalty Programs."
Below the table are example relating to the table. Beneath the "Value Added
Promotions" table entry is the following list: "Latest Products," "Custom
Stores," "No Sales Tax" and "Shipping Offers," and photographs of a camcorder, a
CD, DVD, and VHS tape, and a large television. Above the camcorder is the text
"More electronics." To the right of the television is a graphic that contains
the text "Red Carpet Delivery" and a picture of a red carpet. Below this graphic
is the text "Our Red Carpet Delivery not only brings 32" TVs (or bigger) to the
consumer's door, but we'll also take it inside, unpack it and haul away the
boxes." Beneath the "Industry Resources" table entry is the following list:
"Articles," "Industry News," "Educational Modules," "Buying Guides," and a
paragraph of text titled "More Information." that reads "800.COM provides
charts, articles, reviews, comparisons and everything people need to make an
informed decision." Below the Community Resources table entry is the following
list: "User Reviews," "User Ratings," "Discussion Groups" and "Wish Lists."
Below the "Pre-Sales Support" table entry is the following list: "Comparisons,"
"Product Info," "Detailed Specs," "Decision Tools" and "Zoom Photos," and a
graphic of a screen shot showing a zoom photo of a stereo component, with text
below the screen shot stating "Detailed views show you exactly what you're
buying." Beneath the "Direct Fulfillment" table entry is the following list:
"Broad Selection," "Competitive Price," "Liberal Returns," "Order Tracking" and
"Fast Delivery," and a picture of our warehouse with text below the picture
stating "Our products are shipped from our dedicated fulfillment center."
Beneath the "Post-Sales Support" table entry is the following list: "Product
Experts," "Configuration Assistance," "Online Support," "Phone Support" and
"After Care Program," and a paragraph of text titled "More Service." that reads
"Our trained product specialists are available seven days a week over the phone,
through e-mail or even by connecting online." There are two pictures under the
paragraph. The first is of our customer care center. The second is a screen shot
of the home page of our Web site. Beneath the second picture is the text "At
800.COM people find everything they need to make an informed decision in one
place." Beneath the "Loyalty Programs" table entry is the following list:
"Special Offers," "Personal Reminders," "Manufacturer News," and "Frequent Buyer
Programs," and a paragraph of text titled "More brands." that reads "We are
authorized retailers of a broad selection of brands, so people can compare."
Beneath the paragraph are graphic brand logos for some of the products we carry:
Sony, JBL, Pioneer, Olympus, RCA, Kenwood, Zenith, Sanyo, Fisher and Sharp,
followed by the text "and 50 more..."
The lower left side of the gatefold has the 800.COM logo with our slogan,
"Electronics. And More." below the logo.
<PAGE> 4
INSIDE BACK COVER
There are five items describing 800.COM's value-added service for online
consumer electronic purchasing. Each item consists of a graphic, a title and a
text description. The graphics are on the left. Each title is directly to the
right of its graphic with the text directly below the title.
The first graphic is a bell. The title is "Service." The text is "We help
people who want electronics to make an informed and satisfying purchase. We
help them before and after the purchase. We're there seven days a week. Anyone
can call to our call center or get online live support from our experts. We
know how it feels not to be understood. We're consumers too."
The second graphic is three stereo speakers. The title is "Selection." The text
is "We have many brands, like Sony, Pioneer, Kenwood, Aiwa, JVC and Philips, so
people can compare. If someone doesn't like the equipment they just got, it can
easily be returned. Because the only thing you should feel remorseful about, is
blasting you neighbors everytime you turn that new stereo system on."
The third graphic is an opened book. The title is "Resources." The text is
"Clicking 800.COM can hook people up not only with our experts, but with other
shoppers as well. We also provide charts, articles, reviews - basically
everything you need to make an informed decision. Because there are many
occasions when you want to be alone. But buying electronics is not one of them."
The fourth graphic is a paper shopping bag with the 800.COM logo on it. The
title is "Convenience." The text is "At 800.COM people find everything they
need in one place. And they don't have to worry about carrying and getting the
new equipment to their house. Our Red Carpet Delivery not only brings the big
stuff into your home, we also unpack it, and even take the boxes away to
recycle. Bad news for chiropractors."
The fifth graphic is the 800.COM logo with the slogan "Electronics. And More."
below it. The title is "800.COM." The text is "We are a leading online
specialty retailer of consumer electronics and related products."
BACK COVER
There is a graphic centered on the page consisting of the 800.COM logo with the
slogan "Electronics. And More." below it.
<PAGE> 5
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT
FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING
OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND
SALES ARE PERMITTED. THE INFORMATION IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS DOCUMENT, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS
OR OF ANY SALE OF OUR COMMON STOCK.
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
-------------------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Summary..................................................... 3
Risk Factors................................................ 7
Use of Proceeds............................................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Dilution.................................................... 17
Selected Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 26
Management.................................................. 40
Related Party Transactions.................................. 45
Principal Shareholders...................................... 47
Description of Capital Stock................................ 50
Shares Eligible for Future Sale............................. 53
Underwriting................................................ 55
Legal Matters............................................... 58
Experts..................................................... 58
Where You Can Find More Information About Us................ 58
Index to Financial Statements............................... F-1
</TABLE>
-------------------------
We hold a registered trademark for the 800.COM logo and a trademark on
800.COM. This prospectus contains service marks, trademarks and trade names of
other companies which are the property of their respective owners.
2
<PAGE> 6
SUMMARY
You should read this summary together with the more detailed information in
this prospectus, including "Risk Factors" and our financial statements and notes
to those statements, regarding our company and the common stock being sold in
this offering.
800.COM
We are a leading online specialty retailer of consumer electronics and
related products. We offer a value-added shopping experience for consumer
electronics that we believe is superior to our competitors. As an authorized
retailer for over 60 of the most widely-recognized consumer electronics brands,
we feature a broad selection of consumer electronics, including televisions, DVD
players, VCRs, home stereo equipment, digital cameras, portable stereos,
personal CD players, MP3 players, car audio, telephones, other communications
products and accessories. We offer our products in combination with detailed
product specifications and decision support tools, extensive information and
content, knowledgeable consultation and support, and superior customer service.
We recorded net sales of $23.7 million for the nine months ended December 31,
1999, with $13.5 million of the total being recorded in the fourth calendar
quarter.
THE MARKET FOR CONSUMER ELECTRONICS
Size, Growth and Market Characteristics. The consumer electronics industry
is attractive because it offers the following advantages:
- LARGE MARKET OPPORTUNITY. Based on our analysis of data reported by the
Consumer Electronics Association, we estimate that total U.S. retail
sales of consumer electronics, excluding personal computers, will exceed
$75 billion in calendar year 2000, representing more than 5% growth over
1999.
- STRONG GROWTH POTENTIAL. We believe that the emergence of new digital
technologies such as DVD, MP3, high definition television (HDTV) and
digital satellite systems (DSS) will continue to fuel strong industry
growth.
- PREDICTABLE PRICES AND ATTRACTIVE PRODUCT MARGINS. Authorized retailers
have traditionally sold higher-quality consumer electronics, other than
personal computers, at attractive product margins. Manufacturers have
facilitated these margins by providing predictable pricing, advertising
allowances and suggested minimum advertised price (MAP) policies.
Barriers to Entry. Despite the attractive nature of the consumer
electronics market, new entrants may have difficulty sourcing product for the
following reasons:
- LACK OF LARGE DISTRIBUTORS. Unlike industries that rely on large,
third-party distributors, higher-quality consumer electronics are
primarily distributed directly from the manufacturer to the retailer.
Reliable and consistent access to product, therefore, depends upon a
retailer's ability to source directly from the manufacturer.
- NEED FOR MANUFACTURER AUTHORIZATION. Manufacturer authorizations are
critical to consumer electronics retailers because manufacturers permit
the majority of their products to be sold only through authorized
channels. The difficult process of obtaining manufacturer authorization
may, in some cases, take in excess of two years. Once granted, these
authorizations can be easily revoked.
- LIMITED ACCESS TO HIGHER-QUALITY PRODUCTS. We believe higher-quality
consumer electronics generally yield higher product margins.
Manufacturers generally authorize only those retailers that have the
skills to properly position their products and provide pre- and
post-sales support at levels proportional to the complexity of specific
products. Unlike specialty retailers who may have access to the full
breadth of a manufacturer's product line, many mass-market retailers are
authorized to carry only lower-margin commodity products.
3
<PAGE> 7
Challenges Facing Consumers. We believe consumers are frustrated by the
often stressful and time-consuming consumer electronics buying experience for
reasons that include:
- COMPLEX BUYING PROCESS. The rapid rate of new product introductions and
technological change creates a complex, multi-step consumer electronics
buying process that often requires significant research, education and
product comparisons.
- POOR BUYING EXPERIENCE. We believe that the traditional retail channel
for consumer electronics fails to satisfy consumer desire for selection,
product information, expert advice and superior customer service.
Challenges Facing Manufacturers. Despite their best efforts, the
traditional consumer electronics retail channel presents significant limitations
for manufacturers, including:
- INSUFFICIENT BRAND PROTECTION. Unsatisfactory customer service,
departures from MAP policies and sales into unauthorized channels
jeopardize the position and perception of valuable manufacturer brands.
- INADEQUATE BRAND PROMOTION. Manufacturers feel under-served when
retailers do not effectively communicate their marketing messages or
properly position their products.
Given the limitations of the traditional consumer electronics retail
channel, we believe that the opportunity exists to create a more compelling
solution.
THE 800.COM SOLUTION
Our online store brings together all of the elements necessary for a
consumer to make an informed and satisfying consumer electronics purchase. We
address the limitations of the traditional consumer electronics retail channel
for consumers and manufacturers by leveraging the Internet and its unique
characteristics. Our solution incorporates the following:
- VALUE-ADDED SHOPPING SERVICES. As an online consumer electronics
specialty retailer, we add value to the shopping experience by providing
detailed product specifications and decision support tools, extensive
information and content, and knowledgeable consultation and support.
- BROAD SELECTION OF AUTHORIZED PRODUCTS. We are authorized to sell
merchandise from over 60 nationally-recognized brands, including, most
recently, Sony and Pioneer. We offer our products without the shelf-space
limitations, store-layout constraints and floor-model expenses faced by
traditional retailers.
- CONTROL OF FULFILLMENT AND DISTRIBUTION. Our control of fulfillment and
distribution operations in-house improves our ability to gain
manufacturer authorizations, carry a customized assortment of products,
reduce shipping and handling costs and shorten delivery times, all of
which contribute to high customer satisfaction and better service.
- COMMITMENT TO FULL-SERVICE RETAILING. We emphasize customer service
during all phases of the customer's online shopping experience. Our
service representatives include experienced consultants with a broad
knowledge of consumer electronics.
THE 800.COM GROWTH STRATEGY
Our goal is to be the world's leading online specialty retailer of consumer
electronics. We intend to achieve this goal by aggressively building our brand,
promoting repeat purchases, maintaining and expanding our authorized dealer
status, enhancing the online shopping experience and continuing our focus as a
value-added retailer.
4
<PAGE> 8
THE OFFERING
COMMON STOCK OFFERED BY 800.COM....... shares
COMMON STOCK TO BE OUTSTANDING AFTER
THIS OFFERING......................... shares
USE OF PROCEEDS....................... For marketing and advertising
expenses, working capital
expenditures and other general
corporate purposes. See "Use of
Proceeds."
PROPOSED NASDAQ NATIONAL MARKET
SYMBOL................................ EHDC
Common stock to be outstanding after this offering is based on shares
outstanding as of December 31, 1999. Except as otherwise noted, it does not
include:
- 2,107,804 shares issuable upon exercise of outstanding options as of
December 31, 1999;
- 70,518 shares available for future grant or issuance under our stock
option plans as of December 31, 1999; and
- 1,978,435 shares issuable upon exercise of warrants outstanding as of
December 31, 1999, 1,761,768 of which will expire if not exercised prior
to the completion of this offering.
Except as otherwise noted, all information in this prospectus:
- reflects the conversion of all outstanding shares of preferred stock into
shares of common stock upon completion of this offering; and
- does not take into account the possible issuance of additional shares of
common stock to the underwriters pursuant to their right to purchase
additional shares to cover over-allotments.
CORPORATE INFORMATION
800.COM's principal executive offices are located at 1516 NW Thurman,
Portland, Oregon 97209, and our telephone number at that address is (503)
944-3600. Our Web site is located at www.800.com. Information contained in our
Web site is not part of this prospectus.
In this prospectus, the "Company," "800.COM," "we," "us" and "our" refer to
800.COM, Inc., an Oregon corporation.
5
<PAGE> 9
SUMMARY FINANCIAL DATA
The statement of operations data for the year ended March 31, 1999, are
derived from our audited financial statements appearing elsewhere in this
prospectus. The statements of operations data for the three-month and nine-month
periods ended December 31, 1998 and 1999, and the balance sheet data as of
December 31, 1999, are derived from unaudited interim financial statements
appearing elsewhere in this prospectus. The summary financial data should be
read in conjunction with our financial statements and the related notes included
elsewhere in this prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
YEAR ENDED -------------------- -------------------
MARCH 31, 1999 1998 1999 1998 1999
----------------- -------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales....................... $ 3,024 $ 1,188 $ 13,468 $ 1,336 $ 23,698
Gross profit.................... (126) 3 995 20 (33)
Total operating expenses........ 11,348 3,865 23,317 4,864 35,135
Loss from operations............ (11,473) (3,862) (22,322) (4,845) (35,168)
Net loss........................ (12,047) (3,921) (22,259) (4,965) (35,727)
Net loss applicable to common
shareholders.................. (12,506) (4,380) (22,263) (5,424) (35,737)
Net loss per share, basic and
diluted....................... $ (6.57) $ (4.08) $ (7.77) $ (4.36) $ (13.07)
Shares used to compute basic and
diluted net loss per share.... 1,903 1,073 2,866 1,244 2,735
Pro forma net loss per share,
basic and diluted............. $ (2.82) $ (0.97) $ (1.98)
Shares used to compute pro forma
basic and diluted net loss per
share......................... 4,431 23,059 18,033
</TABLE>
The following table presents summary balance sheet data as of December 31,
1999; pro forma to reflect the conversion of all outstanding shares of preferred
stock into shares of common stock upon completion of this offering, and the cash
exercise of vested warrants for 1,541,768 shares of common stock, which are
forfeited if not exercised prior to the completion of this offering; and pro
forma as adjusted for the sale of shares of our common stock in
this offering at an initial public offering price of $ per share and the
application of the net proceeds after deducting underwriting discounts and
commissions and estimated offering expenses. See "Use of Proceeds" and
"Capitalization."
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................. $ 24,885 $24,885
Working capital........................................... 28,477 28,477
Total assets.............................................. 42,360 42,360
Mandatorily redeemable preferred stock.................... 77,532 --
Accumulated deficit....................................... (47,775) (47,775)
Total shareholders' (deficit) equity...................... (43,296) 35,530
</TABLE>
6
<PAGE> 10
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about these risks, together
with the other information contained in this prospectus, before you decide to
buy our common stock. If any of the following risks actually occur, our
business, results of operations and financial condition would likely suffer. In
these circumstances, the market price of our common stock could decline, and you
may lose all or part of the money you paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES, WE EXPECT TO CONTINUE TO INCUR LOSSES AND WE MAY
NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred substantial net losses in every quarter since we began
operations in April 1998. We incurred net losses of $12.0 million in fiscal year
1999 and of $35.7 million in the nine months ended December 31, 1999, and as of
December 31, 1999, we had an accumulated deficit of $47.8 million. We plan to
increase our operating expenses to develop our brand through advertising and
other promotional activities, improve our transaction-processing and
order-fulfillment systems and enhance our Web site and customer service
capabilities. As a result, we expect to incur significant operating losses on a
quarterly and annual basis for the foreseeable future.
WE HAVE A LIMITED OPERATING HISTORY AND CANNOT BE CERTAIN THAT CONSUMERS WILL
ACCEPT OUR BUSINESS MODEL FOR CONSUMER ELECTRONICS PURCHASES.
We were incorporated in 1997 and began selling products on our Web site in
October 1998. Accordingly, we have a limited operating history with which you
can evaluate our business and prospects. Our business is new and will not be
successful unless consumers increasingly adopt our online model of consumer
electronics retailing. Some consumers may prefer to purchase consumer
electronics from store-based retailers or from online stores that also have
traditional stores within their geographic areas. Our prospects must be
considered in light of the risks and uncertainties encountered by early-stage
companies in new and rapidly evolving markets such as electronic commerce.
OUR QUARTERLY RESULTS FLUCTUATE SIGNIFICANTLY. IF THOSE RESULTS FALL SHORT OF
ANTICIPATED LEVELS, OUR STOCK PRICE MAY DECLINE.
Our quarterly operating results have fluctuated in the past and we expect
they will fluctuate in the future. Because our operating results are volatile
and difficult to predict, we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future performance. If our
operating results fall below the expectations of securities analysts and
investors, the price of our common stock may decline significantly. The
following are material factors that may affect our business or cause our
operating results to fluctuate:
- our ability to obtain new customers at reasonable cost, retain existing
customers or encourage repeat purchases;
- our ability to manage inventory levels;
- our ability to manage our order-fulfillment operations;
- our ability to adequately secure, maintain, upgrade and develop our Web
site, or the systems that we use to process customer orders and payments;
- the ability of our competitors to offer new or enhanced Web sites,
services or products;
7
<PAGE> 11
- the availability and pricing of merchandise from vendors;
- our ability to maintain and enhance our manufacturer authorizations;
- increases in the cost of online or offline advertising; and
- cyclical changes in the economy or the consumer electronics industry.
A number of factors will cause our gross margins to fluctuate in future
periods, including our product mix, the level of discounts and promotional
pricing, inventory management and the level of product returns. Any change in
one or more of these factors could reduce our gross margins in future periods.
OUR FAILURE TO ESTABLISH THE 800.COM BRAND QUICKLY MAY ADVERSELY AFFECT OUR
MARKET SHARE OR REVENUE GROWTH.
We must establish, maintain and enhance the 800.COM brand to attract more
customers to our Web site and to generate sales. Brand recognition and customer
loyalty will become increasingly important as more companies with
well-established brands in traditional consumer electronics retailing or in
other types of online retailing offer competing products and services on the
Internet. Brand development will require aggressive advertising and promotional
campaigns, which will be costly. Our failure to establish and enhance the
800.COM brand may adversely affect our ability to capture market share and grow
revenue.
IF WE ARE UNABLE TO MAINTAIN AND ENHANCE OUR AUTHORIZATIONS FROM KEY VENDORS,
OUR BUSINESS WILL SUFFER.
Our success is dependent upon our ability to maintain and enhance our
authorizations from key vendors and thereby receive sufficient quantities of
their most desirable products. We generally do not have long-term or exclusive
arrangements with our vendors that guarantee us the continued availability of
those manufacturers' consumer electronics. As is customary in the consumer
electronics industry, vendors can generally terminate our authorizations on 30
days' notice. Our vendors distribute products through a variety of channels,
including traditional consumer electronics retailers, department stores,
discount retailers and, in some cases, our online competitors. In addition, our
vendors could establish their own retailing efforts, which may impact our
ability to get sufficient product allocations from such vendors.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.
The consumer electronics market is highly fragmented and intensely
competitive. The electronic commerce market for consumer electronics is new and
rapidly evolving. We expect competition to intensify in the future. Increased
competition may result in loss of market share or reduced profitability.
Furthermore, some promotional activities used by us and our competitors may
reduce our ability to improve our margins.
We currently compete with a variety of companies, including:
- store-based consumer electronics specialty retailers, ranging in size
from a single store to regional and national chains, such as Best Buy
Co., Inc. and Circuit City Stores, Inc.;
- discount retailers and price clubs, such as Costco Wholesale Corp. and
Wal-Mart Stores, Inc.;
- department stores, such as Sears, Roebuck and Co.;
- catalog retailers, such as Crutchfield Corporation;
- non-specialized online retailers, such as Amazon.com, Inc., Buy.com Inc.
and Mercata Inc., that include consumer electronics products among their
product offerings; and
- online consumer electronics specialty retailers, such as electronics.net
and ROXY.com, Inc.
8
<PAGE> 12
The markets for our movies, music and video game products are also
intensely competitive. We compete with both store-based and online competitors
in these markets.
Many store-based and catalog competitors have online stores or plan to open
online stores to complement their traditional business models. Many traditional
store-based, catalog and online competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than we do. Many of these competitors
can devote substantially more resources to advertising and Web site development
than we can. In addition, these competitors may be able to secure products from
vendors on more favorable terms and adopt more aggressive pricing policies than
we can. These factors may prevent us from gaining sufficient market share to
succeed in our business.
THE LOSS OF SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL COULD DISRUPT OUR
OPERATIONS OR CAUSE US TO LOSE CUSTOMERS.
Our success depends largely on the continued contributions of our key
management personnel, many of whom would be difficult to replace. The loss of
one or more members of our senior management team could disrupt our operations
and divert our other management resources. Furthermore, the loss of senior
members of our merchandising team could disrupt or impair our relationship with
one or more of our vendors.
WE CARRY MOST OF THE PRODUCTS WE SELL IN INVENTORY. IF WE FAIL TO ACCURATELY
PREDICT AND PLAN FOR CHANGES IN CONSUMER DEMAND, OUR SALES AND GROSS PROFIT
MARGIN MAY DECREASE.
We carry inventory on most of the products we sell. At December 31, 1999,
we held approximately $9.6 million of products in inventory and we expect this
number will increase in the future in order to support higher sales volumes. As
a result, rapid advances in technology and changing trends in tastes for
consumer electronics products subject us to significant inventory risks. It is
critical to our success that we accurately predict these developments and do not
overstock outdated or unpopular products. We are particularly exposed to this
risk because we derive a majority of our net sales in the fourth calendar
quarter of each year. Our failure to sufficiently stock popular products in
advance of the fourth calendar quarter would harm our operating results for the
entire fiscal year. In the event that one or more products do not achieve
widespread consumer acceptance, we may be required to take significant inventory
markdowns, which could reduce our gross margins. We expect this risk to be
greatest in the first calendar quarter of each year, after we have significantly
increased inventory levels for the holiday season.
WE DEPEND ON OUR RELATIONSHIPS WITH INTERNET PORTAL SITES SUCH AS AOL, MICROSOFT
NETWORK AND OTHER ONLINE PARTNERS TO DRIVE CONSUMER TRAFFIC TO OUR WEB SITE.
We have relationships with America Online Inc., the Microsoft Network and
various other Web sites to provide content and advertising banners that link to
our Web site. We also rely on search engines, directories and other navigational
tools to direct traffic to our Web site. None of these relationships give us
exclusive rights, and these portals and online partners can, and typically do,
enter into similar arrangements with our competitors. We cannot be sure that our
relationships with these and other key online partners will be available to us
in the future. If we are unable to maintain satisfactory relationships with
these parties on acceptable commercial terms, or if our competitors are better
able to leverage such relationships, our business could suffer. We are required
to make payments to some of our online partners, in some cases without regard to
the amount of revenue that is generated as a result of the relationship. We may
not achieve traffic or product purchases sufficient to compensate us for those
payments, which could result in increased operating losses.
9
<PAGE> 13
WE MAY BE UNABLE TO CONTINUE OUR AFFILIATE PROGRAM WHICH DRIVES TRAFFIC TO OUR
WEB SITE.
Referrals from the over 22,000 affiliates in our affiliate program generate
a significant portion of our revenue. We have an agreement with Be Free, Inc. to
administer this program. Be Free may be unwilling or unable to continue to
provide these services. In particular, Be Free could be required to cease
providing such services if its technology were found to infringe U.S. Patent
6029141, titled Internet-based customer referral system, which issued to
Amazon.com, Inc. on February 22, 2000, and if it were unable to obtain a license
from Amazon.com or substitute non-infringing technology. We could also be found
directly or contributorily liable for infringing this patent which could result
in an injunction or damages or both. If we are unable to continue our affiliate
program, our Web site traffic could lessen and our business could suffer.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
We expect the net proceeds from this offering, current cash balances and
cash equivalents to meet our working capital and capital expenditure needs for
at least the next 12 months. Because we are not currently generating sufficient
cash to fund our operations, we may need to raise capital after that time. We
may not be able to obtain additional financing on favorable terms, if at all. If
we issue equity securities to raise capital, shareholders may experience
additional dilution or the new equity securities may have rights, preferences or
privileges senior to those of existing holders of common stock. If we cannot
raise capital on acceptable terms, we may be forced to discontinue operations,
or our operating results may be harmed by our inability to advertise, enhance
our technology and service capabilities or take advantage of future business
opportunities.
IF WE ARE UNABLE TO MANAGE OUR GROWTH, OUR OPERATING RESULTS WILL SUFFER.
We have rapidly expanded our business since our incorporation in 1997, and
expect our rapid growth to continue if our online sales model is accepted by
consumers. We may not be able to manage this growth effectively, which may
result in disruptions to our operations from time to time. Recent increases in
our employee base, facilities requirements and sales volume have placed
significant demands on our management, operational and financial resources. To
manage this growth we may need to upgrade or add to our information systems,
office and warehouse space and fulfillment operations. Because we seek to
differentiate ourselves on the quality of our customer service, it is essential
for us to staff our customer service center with personnel possessing extensive
consumer electronics product knowledge. If we are unable to hire qualified
personnel or if newly-hired personnel fail to develop the necessary skills, our
customer support will be inadequate, which may cause us to lose or fail to
attract new customers. Our future results of operations will depend on the
ability of our officers and key employees to manage changing business conditions
and to implement and improve our technical, administrative, financial control
and reporting systems in response to our anticipated rapid growth.
WE EXPECT TO EXPERIENCE SEASONAL FLUCTUATIONS IN OUR SALES, WHICH WILL CAUSE OUR
QUARTERLY RESULTS TO FLUCTUATE AND COULD CAUSE OUR ANNUAL RESULTS TO FALL SHORT
OF ANTICIPATED LEVELS.
We expect to experience significant seasonal fluctuations in our net sales
that will cause quarterly fluctuations in our operating results. In particular,
we realized approximately 40% of our projected net sales for fiscal year 2000
during the fourth calendar quarter primarily due to gift purchases made during
the holiday season. We expect this trend to continue. In anticipation of
increased sales activity during future fourth calendar quarters, we expect to
hire a significant number of temporary employees and significantly increase our
inventory levels. For this reason, if our net sales are below seasonal
expectations during future fourth calendar quarters, our annual operating
results may fall below the expectations of securities analysts and investors,
which could cause our stock price to fall. Because our operating history is
limited, it is difficult to predict the seasonal pattern of our sales and the
impact of seasonality on our business and financial results.
10
<PAGE> 14
WE RELY ON THIRD-PARTY CARRIERS TO MAKE TIMELY, CONSISTENT DELIVERIES OF OUR
PRODUCTS.
We rely upon third-party carriers, including the U.S. Postal Service and
United Parcel Service, for product shipments, including shipments to and from
our warehouse, as well as a number of carriers that implement our Red Carpet
Delivery Service for delivery of large screen televisions. We are therefore
subject to the risks, including employee strikes and inclement weather,
associated with these carriers' ability to provide delivery services to meet our
shipping needs. Their failure to deliver products to our customers in a timely
manner may damage our reputation and brand. These carriers may not be able to
handle increased shipping volumes, in which case we may be required to identify
and use alternative carriers with which we currently have no relationship.
OUR FACILITIES, SYSTEMS AND OPERATIONS ARE VULNERABLE TO NATURAL DISASTERS AND
OTHER UNEXPECTED PROBLEMS.
Fire, flood, earthquake, power loss, telecommunications failure, sabotage
and similar events could damage our data center or fulfillment center. This
would likely render us unable to accept or fill orders, possibly for an extended
period of time. We do not have a disaster recovery site for our computer
operations. Our insurance may not adequately compensate us for losses that may
occur due to failures or interruptions in our systems.
RISKS RELATED TO OUR INDUSTRY
WE ARE DEPENDENT UPON THE INTERNET'S CONTINUED GROWTH AND DEVELOPMENT AS A
MEDIUM FOR COMMERCE TO GENERATE SUFFICIENT REVENUE FOR PROFITABILITY.
We are dependent upon a broad base of consumers adopting and continuing to
use the Internet as a medium for commerce. Use of the Internet to effect retail
transactions is at an early stage of development. Therefore, consumer demand for
products and services recently introduced over the Internet is subject to a high
level of uncertainty. Few proven business models for electronic commerce exist.
The development of the Internet into a viable commercial marketplace is subject
to a number of factors, including:
- concerns about transaction security;
- continued development of the necessary technological infrastructure;
- development of Internet access technologies; and
- uncertain and increasing government regulation.
If commercial use of the Internet does not continue to grow, our sales
growth may be adversely affected.
INTELLECTUAL PROPERTY CLAIMS AGAINST US COULD BE COSTLY.
Though we cannot predict whether they will do so, other parties may assert
infringement or unfair competition claims against us. If we are forced to defend
against any infringement claims, whether they are with or without merit or are
determined in our favor, we may face significant litigation costs and diversion
of technical and management personnel. Furthermore, the outcome of a dispute may
require us to enter into royalty or licensing agreements in order to continue
using infringing technology. Royalty or licensing agreements, if required, may
be unavailable on terms acceptable to us, if at all. Accordingly, if any of our
core technology were found to be infringing, we might be required to cease
operations until such time that non-infringing technology could be developed.
11
<PAGE> 15
PROBLEMS WITH ONLINE SECURITY OR CREDIT CARD FRAUD COULD DAMAGE OUR BRAND AND
REPUTATION.
Consumer concerns about the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
electronic commerce. To securely transmit confidential information, such as
customer credit card numbers, we rely on encryption and authentication
technology. We cannot predict whether events or developments will result in a
compromise of the systems we use to protect customer transaction data.
Furthermore, our servers may be vulnerable to computer viruses, physical or
electronic break-ins, denial of service attacks and similar disruptions. Our
business may be adversely affected if our security measures do not prevent
security breaches. We may need to expend significant additional resources to
protect against a security breach or to alleviate problems caused by any
breaches.
OUR SALES COULD DECREASE IF WE BECOME SUBJECT TO SALES TAXES.
If any jurisdiction passes legislation compelling us to collect sales taxes
on the sale of our products, our sales could decrease. As all of our operations
are in Oregon, a state with no sales tax, we do not currently collect any sales
taxes. However, taxing authorities in a number of states are currently reviewing
the appropriate tax treatment of companies engaged in electronic commerce. In
addition, our rate of sales growth could decrease if sales taxes discourage
consumers from purchasing products online.
FUTURE GOVERNMENT REGULATION COULD INCREASE OUR COSTS OF DOING BUSINESS.
As the Internet continues to evolve, federal, state and foreign governments
may adopt laws and regulations covering issues such as user privacy, taxation of
electronic commerce, content and quality of products and services. Although
there are currently few laws and regulations directly applicable to the Internet
and online retailing services, it is possible that a number of laws and
regulations may be adopted with respect to the Internet. In addition, issues
surrounding the applicability to the Internet of existing laws on intellectual
property, taxation, libel, obscenity and personal privacy are still evolving.
For example, the Federal Trade Commission has recently initiated action against
at least one Web site regarding the manner in which information is collected
from users and provided to third parties. Several states have proposed
legislation that would limit the use of personal information gathered online. As
part of our effort to personalize consumers' retail experience at our Web site,
we gather a significant amount of information about our customers' interactions
with our service representatives and their purchases. We use this information to
improve customer service and in our direct marketing efforts. Thus, our business
could be harmed by governmental actions designed to preserve consumer privacy.
The adoption of any additional laws or regulations regarding Internet commerce
could decrease the growth of the Internet and, in turn, decrease the demand for
our products and services.
WE COULD FACE LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED THROUGH
OUR WEB SITE.
As a publisher and distributor of online content, we face potential
liability for defamation, negligence, copyright, trademark infringement and
other claims based on the nature and content of the materials that we publish or
distribute. Such claims have been successfully brought against online services.
In addition, we do not screen all of the content generated by our users on the
bulletin board system on our Web site, and we could be exposed to liability with
respect to such content. Although we carry general liability insurance, our
insurance may not cover claims of these types or may not be adequate to cover us
for all liability that may be imposed. Any imposition of liability, particularly
liability that is not covered by insurance or is in excess of insurance
coverage, could negatively impact our reputation, result in litigation costs or
increased insurance costs and give rise to monetary damages.
12
<PAGE> 16
RISKS RELATED TO THE SECURITIES MARKETS
FUTURE SALES OF OUR STOCK COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.
Sales of a substantial number of shares of our common stock in the public
market after this offering could cause the market price of our common stock to
decline. In addition, the sale of these shares could impair our ability to raise
capital through the sale of additional equity securities. Upon completion of
this offering, we will have approximately shares of common stock
outstanding, and approximately shares if the underwriters'
over-allotment option is exercised in full, based on shares outstanding as of
December 31, 1999.
Our officers and directors and substantially all of our existing
shareholders and holders of options exercisable within 180 days of the date of
this offering have agreed with our underwriters not to sell or otherwise dispose
of any of their shares for a period of 180 days after the date of this offering.
When these lockup agreements expire, these shares and the shares underlying any
options held by these individuals will become eligible for sale, in some cases
subject to the volume, manner of sale and notice requirements of Rule 144 of the
Securities Act of 1933. Both the anticipation of the expiration of the lockup
period and the actual expiration of the lockup period may cause a decline in the
market price of our common stock. See "Shares Eligible for Future Sale" for
further discussion of the shares that will be freely tradable after the date of
this prospectus.
OUR STOCK PRICE MAY BE VOLATILE, WHICH MAY LEAD TO LOSSES BY INVESTORS.
You may not be able to resell your shares at or above the initial public
offering price. The stock prices of companies engaged in online commerce have
historically been volatile and may continue to be volatile. No public market for
our shares existed before this offering, and after this offering an active
public market for the shares may not develop. The initial public offering price
we negotiate with the representatives of the underwriters will likely vary from
the market price of the common stock after this offering.
OUR DIRECTORS AND EXECUTIVE OFFICERS WILL RETAIN SIGNIFICANT CONTROL AFTER THIS
OFFERING, WHICH MAY LEAD TO CONFLICTS WITH OTHER SHAREHOLDERS OVER CORPORATE
GOVERNANCE.
Following the completion of this offering, our directors, executive
officers and entities affiliated with our directors will beneficially own
approximately % of our outstanding common stock. These shareholders, if able
to act together, would be able to substantially control all matters requiring
approval by our shareholders, including the election of directors and
significant corporate transactions, such as mergers or other business
combination transactions. This control may have the effect of delaying or
preventing a third party from acquiring or merging with us.
OUR CHARTER DOCUMENTS AND OREGON LAW MAY INHIBIT A TAKEOVER OR CHANGE IN OUR
CONTROL THAT A SHAREHOLDER MAY CONSIDER FAVORABLE.
Provisions in our articles of incorporation and bylaws may have the effect
of delaying or preventing a third party from acquiring or merging with us, or
making a merger or acquisition less desirable to a potential acquirer, even
where the shareholders may consider the acquisition or merger favorable.
Provisions of the Oregon Business Corporation Act and the Control Share Act, to
which we are subject, may also delay, prevent or discourage someone from
acquiring or merging with us. See "Description of Capital Stock -- Anti-Takeover
Measures -- Oregon Control Share and Business Combination Statutes" for further
discussion.
13
<PAGE> 17
YOU SHOULD NOT RELY ON OUR FORWARD-LOOKING STATEMENTS.
This prospectus contains forward-looking statements that involve risks and
uncertainties that may cause our actual results to differ materially from any
forward-looking statement. These statements relate to future events or our
future financial performance. In some cases, you can identify forward-looking
statements by terminology including "could," "may," "will," "should," "expect,"
"plan," "anticipate," "believe," "estimate," "predict," "potential" or
"continue," the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks described above and in other parts of the
prospectus.
We cannot guarantee future results, levels of activity, performance or
achievements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform them to actual results
or to changes in our expectations.
14
<PAGE> 18
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of
common stock offered in this offering will be $ million, based on an initial
public offering price of $ per share, and after deducting underwriting
discounts and commissions and estimated offering expenses. If the underwriters'
over-allotment option is exercised in full, we estimate that our net proceeds
will be $ million.
The primary purposes of this offering are to obtain additional capital to
increase our financial flexibility, to create a public market for our common
stock and to facilitate our future access to public capital markets. We plan to
use the net proceeds from this offering for increased marketing and advertising
expenses, working capital expenditures and other general corporate purposes. We
have not yet determined with any certainty the manner in which we will allocate
the net proceeds. The amount and timing of these expenditures will vary
depending on a number of factors including the amount of cash generated by our
operations, competitive and technological developments and the rate of growth,
if any, of our business. Pending these uses, we intend to invest the net
proceeds of this offering in short-term, interest-bearing, investment-grade
securities. Our board of directors has broad discretion in determining how the
net proceeds of this offering will be applied.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
intend to retain earnings, if any, to fund the operation and growth of our
business and do not anticipate paying any cash dividends in the foreseeable
future.
15
<PAGE> 19
CAPITALIZATION
The following table should be read in conjunction with our financial
statements and related notes included elsewhere in this prospectus. The table
sets forth the following information:
- our actual capitalization as of December 31, 1999; and
- our pro forma capitalization to reflect the conversion of all 19,983,425
outstanding shares of preferred stock into 19,983,425 shares of common
stock, and the cash exercise of vested warrants to purchase 1,541,768
shares of common stock that will be forfeited if not exercised prior to
the completion of this offering; and
- our pro forma capitalization as adjusted for the sale of
shares of common stock at the initial public offering price of
$ per share (less underwriting discounts and commissions and
estimated expenses we expect to pay in connection with this offering).
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Series A deemed mandatorily redeemable convertible
preferred stock, $0.01 par value: 4,000,000 shares
authorized, issued and outstanding actual; no shares
authorized, issued or outstanding pro forma and pro forma
as adjusted.............................................. $ 3,940 $ --
Series B mandatorily redeemable, convertible preferred
stock, $0.01 par value: 7,500,000 shares authorized and
7,262,442 shares issued and outstanding actual; no shares
authorized, issued or outstanding pro forma and pro forma
as adjusted.............................................. 16,000 --
Series C mandatorily redeemable, convertible preferred
stock, $0.01 par value: 9,277,156 shares authorized and
8,720,983 shares issued and outstanding actual; no shares
authorized, issued or outstanding pro forma and pro forma
as adjusted.............................................. 57,593 --
Shareholders' (deficit) equity:
Preferred stock, $0.01 par value: no shares authorized,
issued or outstanding, actual and pro forma;
shares authorized, no shares issued and
outstanding pro forma as adjusted..................... -- --
Common stock, $0.01 par value: 50,000,000 shares
authorized, 4,238,246 shares issued and outstanding
actual; 50,000,000 shares authorized and 25,763,439
shares issued and outstanding pro forma;
shares authorized and shares
issued and outstanding pro forma as adjusted.......... 42 258
Additional paid-in capital................................. 5,751 84,361
Unearned compensation...................................... (1,314) (1,314)
Accumulated deficit........................................ (47,775) (47,775)
------- ------- ------
Total shareholders' (deficit) equity.................. (43,296) 35,530
------- ------- ------
Total capitalization............................. $34,237 $35,530
======= ======= ======
</TABLE>
The table above excludes the following shares:
- 2,107,804 shares of common stock issuable upon the exercise of
outstanding options with a weighted average exercise price of $2.01 per
share;
- 70,518 additional shares of common stock available for issuance under our
stock option plans; and
- 436,667 shares of common stock issuable upon the exercise of outstanding
warrants with a weighted average exercise price of $6.11 per share,
220,000 of which will expire if not exercised prior to the completion of
this offering.
16
<PAGE> 20
DILUTION
The pro forma net tangible book value of our common stock as of December
31, 1999 was approximately $35.5 million or $1.38 per share of common stock. Net
tangible book value per share represents the amount of shareholders' equity, net
of intangible assets and total liabilities, after giving effect to the
conversion of all outstanding shares of preferred stock into shares of common
stock upon completion of this offering.
Net tangible book value dilution per share to new investors represents the
difference between the amount paid per share by purchasers of common stock in
this offering and the net tangible book value per share of common stock
immediately after completion of this offering. After giving effect to our sale
of shares of common stock in this offering at the initial public
offering price of $ per share and after deducting underwriting discounts and
commissions and estimated offering expenses, our net tangible book value as of
December 31, 1999, would have been approximately $ million or $ per share.
This represents an immediate increase in net tangible book value of $ per
share to existing shareholders and an immediate dilution in net tangible book
value of $ per share to purchasers of common stock in this offering, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of December
31, 1999............................................... $1.38
Increase per share attributable to new investors..........
-----
Pro forma net tangible book value per share after this
offering..................................................
-------
Dilution per share to new investors......................... $
=======
</TABLE>
The following table shows on a pro forma basis as of December 31, 1999,
after giving effect to the conversion of all outstanding shares of preferred
stock into common stock and the cash exercise of vested warrants to purchase
1,541,768 shares of common stock that will be forfeited if not exercised prior
to the completion of this offering, the differences between the existing
shareholders and the purchasers of shares in this offering, at the initial
offering price of $ per share, with respect to the number of shares
purchased from us, the total consideration paid and the average price per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
---------- ------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............ 25,763,439 % $78,915,490 % $3.06
New investors....................
---------- --- ----------- --- -------
Total.......................... % $ %
---------- --- ----------- ---
---------- --- ----------- ---
</TABLE>
The tables above assume no exercise of the underwriters' over-allotment
option and no exercise of any stock options and warrants outstanding as of
December 31, 1999. As of December 31, 1999, there were options outstanding to
purchase a total of 2,107,804 shares of common stock at a weighted average
exercise price of $2.01 per share. In addition to the warrants assumed exercised
in the above table, as of December 31, 1999, there were warrants outstanding to
purchase 436,667 shares of common stock at a weighted average exercise price of
approximately $6.11 per share, 220,000 of which will expire if not exercised
prior to the completion of this offering. To the extent outstanding options or
warrants are exercised, there will be further dilution to new investors. See
"Management -- Stock Plans" and note 9 of the notes to our financial statements.
17
<PAGE> 21
SELECTED FINANCIAL DATA
The following selected financial and operating data should be read in
conjunction with the financial statements and the notes to the financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which are included elsewhere in this prospectus. You
should review note 1 to the notes to our financial statements for an explanation
of the determination of the number of shares and share equivalents used in
computing the per share amounts shown below. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The statement of operations data shown below for the year ended March 31,
1999, and the selected balance sheet data as of March 31, 1999, have been
derived from our audited financial statements appearing elsewhere in this
prospectus. The statement of operations data for the nine months ended December
31, 1999 and December 31, 1998, and the selected balance sheet data as of
December 31, 1999 are derived from information compiled by 800.COM and are
unaudited. In the opinion of management, the unaudited statements of operations
data shown for the nine month periods ended December 31, 1999 and December 31,
1998 and the unaudited balance sheet data as of December 31, 1999, have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for such
periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31,
MARCH 31, -------------------------
1999 1998 1999
---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales............................................. $ 3,024 $ 1,336 $ 23,698
Cost of goods sold.................................... 3,150 1,316 23,731
---------- ---------- -----------
Gross profit.......................................... (126) 20 (33)
Operating expenses:
Sales and marketing................................. 8,941 3,970 30,199
Information systems................................. 1,161 573 2,572
General and administrative.......................... 1,245 322 2,364
---------- ---------- -----------
Loss from operations.................................. (11,473) (4,845) (35,168)
Interest income (expense), net........................ (574) (120) (559)
---------- ---------- -----------
Net loss.............................................. (12,047) (4,965) (35,727)
Deemed dividend on preferred stock.................... (459) (459) --
Accretion on mandatorily redeemable preferred stock... -- -- (10)
---------- ---------- -----------
Net loss applicable to common shareholders............ $ (12,506) $ (5,424) $ (35,737)
========== ========== ===========
Net loss per share, basic and diluted................. $ (6.57) $ (4.36) $ (13.07)
========== ========== ===========
Shares used to compute net loss per share, basic and
diluted............................................. 1,903 1,244 2,735
========== ========== ===========
Pro forma net loss per share, basic and diluted....... $ (2.82) $ (1.98)
========== ===========
Shares used to compute pro forma net loss per share,
basic and diluted................................... 4,431 18,033
</TABLE>
18
<PAGE> 22
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1999
--------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 8,002 $ 24,885
Working capital............................................. 7,459 28,477
Total assets................................................ 11,161 42,360
Mandatorily redeemable preferred stock...................... 19,935 77,532
Accumulated deficit......................................... (12,047) (47,775)
Total shareholders' deficit................................. (10,543) (43,296)
</TABLE>
19
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information, the discussion in this prospectus
contains forward-looking statements that involve risks and uncertainties. These
statements refer to our future plans, objectives, expectations and intentions.
These statements may be identified by the use of words such as "expects,"
"anticipates," "intends," "plans" and similar expressions. Our actual results
could differ materially from those anticipated in the forward-looking
statements. Factors that could contribute to these differences include, but are
not limited to, the risks discussed in the section titled "Risk Factors."
OVERVIEW
We were incorporated in the state of Oregon on December 30, 1997, and
commenced operations in April 1998. Since inception, we have focused on
broadening our product offerings, establishing relationships with key consumer
electronics vendors, building our brand, generating sales momentum, building our
customer base and expanding our operational and customer service capabilities.
We have grown rapidly since launching our Web site in October 1998. Our net
sales have grown from $3.0 million for the fiscal year ended March 31, 1999, to
$23.7 million for the nine months ended December 31, 1999. Our cost of goods
sold and our operating expenses have also increased significantly since
inception, with cost of goods sold and total operating expenses in the nine
months ended December 31, 1999, of $23.7 million and $35.1 million,
respectively. This trend reflects increased costs associated with net sales
growth and additional sales and marketing expenses to attract new customers and
build brand awareness. In addition, information systems and general and
administrative expenses increased in connection with building infrastructure and
developing our Web site and associated systems.
The market for consumer electronics and home entertainment products is
highly seasonal with a disproportionate amount of net sales occurring during the
fourth calendar quarter. Although less significant, seasonal sales periods also
occur in May and June due to graduation gift giving, Mother's Day and Father's
Day. We expect that these trends will continue in future periods. In addition,
since a disproportionate amount of our net sales are realized during the fourth
calendar quarter, we significantly increase our purchases of inventory during
and in advance of that quarter. Accordingly, we expect that our accounts payable
will be at their highest levels during the fourth calendar quarter.
Our gross profits fluctuate based on factors such as product sales mix,
promotional activities, the mix of direct and indirect sources of inventory,
pricing strategy and inventory management. In general, the gross profit
associated with the sales of consumer electronics hardware is higher than that
associated with the sales of movies, music and video games. As we continue to
focus on moving our sales mix predominantly toward higher margin consumer
electronics hardware, we expect our gross profits to increase. As our brand
awareness increases, we expect to decrease our usage of coupons and other
promotional discounts. We anticipate that this will favorably impact our gross
profits. As our product sourcing continues to move from indirect suppliers to
direct manufacturer relationships and as our existing direct relationships
mature, we will earn the opportunity to take advantage of better pricing and
other merchandise incentives offered through such relationships, all of which we
believe should increase our gross profits.
We incurred significant net losses of $12.0 million for the fiscal year
ended March 31, 1999, and $35.7 million for the nine months ended December 31,
1999. We expect our net losses to increase and expect to generate negative cash
flows for the foreseeable future. We expect operating expenses and net losses
will continue to rise as we pursue an aggressive marketing and advertising
campaign to attract new customers, build our brand identity, develop new
strategic partnerships, invest in new operational and customer service
infrastructure and recruit additional employees. As a result of our limited
operating history, it is difficult to accurately forecast our net sales or
project operating expenses. We base our current and future expense levels on our
operating plans and estimates of future net sales, and our expenses are fixed to
a large extent. As the volume and timing of the orders are difficult to
forecast, we may be unable
20
<PAGE> 24
to adjust our spending in a timely manner to compensate for any unexpected
revenue increases or shortfalls. This inability could cause our net losses in a
given quarter to be greater than expected.
We have recognized total deferred stock-based compensation of $2.4 million
from inception through December 31, 1999. Of this amount, $138,358 was charged
to operations for the fiscal year ended March 31, 1999, and $902,547 was charged
to operations for the nine months ended December 31, 1999. The remaining balance
of $1.3 million will be amortized over the vesting periods of the underlying
options through the fiscal year ended March 31, 2003.
Amortization of the deferred stock-based compensation expense for each of
the next four fiscal years is expected to be as follows:
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT
---------- --------
<S> <C>
March 31, 2000.............................................. $109,656
March 31, 2001.............................................. 630,872
March 31, 2002.............................................. 342,247
March 31, 2003.............................................. 135,023
</TABLE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999
NET SALES
Net sales consist of product sales to customers and are net of product
returns, coupons and promotional discounts. We recognize revenue at the time
products are shipped to our customers. Net sales increased from $1.3 million
during the nine months ended December 31, 1998, to $23.7 million for the nine
months ended December 31, 1999. The growth in net sales was principally due to
the commercial launch of our Web site in October 1998, increased Web site
traffic resulting from aggressive online and offline marketing activities,
including a major newspaper and television advertising campaign during the 1999
holiday shopping season, extensive use of product promotions and coupons to
generate net sales and increased brand awareness.
COST OF GOODS SOLD
Cost of goods sold consists primarily of the cost of products sold, inbound
freight expenses, inventory shrinkage and inventory obsolescence costs. Cost of
goods sold increased during the nine months ended December 31, 1999, compared to
the nine months ended December 31, 1998, as a result of increased sales. Gross
profits as a percentage of net sales decreased to (0.14%) for the nine months
ended December 31, 1999 compared to 1.5% for the nine months ended December 31,
1998, principally due to shifts in our product mix and the use of coupons and
promotional discounts to attract customers. We expect gross profits to increase
in the future as our product mix shifts more toward the sale of higher product
margin consumer electronics hardware, as we continue to develop our direct
supplier relationships, and as we reduce our usage of coupons and promotional
discounts.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of
advertising costs, fees paid to online distribution partners, credit card fees,
customer service and fulfillment expenses, outbound shipping costs and revenues,
distribution center facility costs and related employee salaries and benefits
expenses. Sales and marketing expenses increased to $30.2 million for the nine
months ended December 31, 1999, compared to $4.0 million for the nine months
ended December 31, 1998, primarily due to the commercial launch of our Web site,
a major newspaper and television advertising campaign during the 1999 holiday
shopping season, increased shipping and fulfillment costs associated with
software
21
<PAGE> 25
sales which have a lower average order size, ongoing facilities costs related to
our new distribution center which opened in September and contractual fees paid
to major online distribution partners. We intend to continue to pursue an
aggressive branding and marketing campaign and to expand our fulfillment
capabilities to accommodate increases in sales volume. Therefore, we expect
sales and marketing expenses to increase significantly in absolute dollars in
future periods.
Information Systems. Information systems expenses include payroll and
related costs associated with Web site design, maintenance and corporate
information systems. Information systems costs increased to $2.6 million during
the nine months ended December 31, 1999, compared to $572,535 for the nine
months ended December 31, 1998, principally due to increased staffing,
consultants and associated costs related to creating and enhancing the features
and functionality of our Web site and the costs of implementing our order
fulfillment, inventory, distribution and accounting systems used to process
customer orders. Certain costs have been capitalized in accordance with
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." We believe that continued investment in
software development is critical to attaining our strategic objectives and, as a
result, expect software development expenses to increase significantly in future
quarters.
General and Administrative. General and administrative expenses include
administrative employee salaries and benefits, professional fees, office lease
expenses, depreciation and other costs. General and administrative expenses
increased to $2.4 million for the nine months ended December 31, 1999, compared
to $321,759 for the nine months ended December 31, 1998, primarily due to
expenses associated with hiring staff for merchandising, finance, human
resources and senior management, and due to expenses related to warrants granted
to outside consultants. We expect general and administrative expenses to
increase as we expand our staff, lease additional facilities, and incur
additional costs related to the growth of our business and being a public
company.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net consists of earnings on our cash and cash
equivalents received from sales of preferred stock, net of interest expense
primarily attributable to bridge financings. Interest expense, net for the
fiscal year ended March 31, 1999, was $574,380 which includes $610,719 of
interest expense, most of which is related to bridge loans in connection with
our Series B preferred stock financing. Interest expense, net for the nine
months ended December 31, 1999, was $558,918, which includes $818,648 of
interest expense related to warrants granted to a bridge lender in connection
with our series C stock financing. This amount was partially offset by interest
income earned during the periods on proceeds from the Series B preferred stock
offering in March 1999 and the Series C preferred stock offering in October and
November 1999.
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<PAGE> 26
QUARTERLY RESULTS OF OPERATIONS
Because we commenced operations in April 1998 and have a short operating
history, we believe that annual period-to-period comparisons are less meaningful
than an analysis of recent quarterly operating results. Accordingly, we are
providing a discussion and analysis of our operating results that is focused on
the seven quarters ended December 31, 1999.
In the following table, we show unaudited statement of operations data both
in absolute dollars and as a percentage of net sales for each of our last seven
quarters. The unaudited quarterly information for each of the quarters in the
fiscal year ended March 31, 1999 has been derived from our audited financial
statements. In the opinion of management, the unaudited quarterly information
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation in accordance with generally accepted
accounting principles. The operating results for any quarter are not necessarily
indicative of the operating results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1999 1999 1999 1999
-------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net sales........................ $ 9 $ 139 $ 1,188 $ 1,688 $ 3,090 $ 7,140 $ 13,468
Cost of goods sold............... 6 126 1,184 1,834 3,194 8,064 12,473
------- ------- ------- ------- ------- ------- --------
Gross profit................... 3 13 4 (146) (104) (924) 995
------- ------- ------- ------- ------- ------- --------
Operating expenses:
Sales and marketing............ 74 557 3,339 4,971 2,602 6,238 21,359
Information systems............ 112 125 336 588 630 845 1,097
General and administrative..... 60 71 191 923 710 793 861
------- ------- ------- ------- ------- ------- --------
Total operating expenses..... 246 753 3,866 6,482 3,942 7,876 23,317
------- ------- ------- ------- ------- ------- --------
Loss from operations............. (243) (740) (3,862) (6,628) (4,046) (8,800) (22,322)
Interest income (expense), net... (13) (48) (59) (454) 54 (676) 63
------- ------- ------- ------- ------- ------- --------
Net loss......................... $ (256) $ (788) $(3,921) $(7,082) $(3,992) $(9,476) $(22,259)
======= ======= ======= ======= ======= ======= ========
AS A PERCENTAGE OF NET SALES:
Net sales........................ 100% 100% 100% 100% 100% 100% 100%
Cost of goods sold............... 67 91 100 109 103 113 93
------- ------- ------- ------- ------- ------- --------
Gross profit................... 33 9 0 (9) (3) (13) 7
------- ------- ------- ------- ------- ------- --------
Operating expenses:
Sales and marketing............ 822 400 281 294 84 87 159
Information systems............ 1,244 90 28 35 21 12 8
General and administrative..... 667 51 16 55 23 11 6
------- ------- ------- ------- ------- ------- --------
Total operating expenses..... 2,733 541 325 384 128 110 173
------- ------- ------- ------- ------- ------- --------
Loss from operations............. (2,700) (532) (325) (393) (131) (123) (166)
Interest income (expense), net... (144) (35) (5) (27) 2 (10) 1
------- ------- ------- ------- ------- ------- --------
Net loss......................... (2,844)% (567)% (330)% (420)% (129)% (133)% (165)%
======= ======= ======= ======= ======= ======= ========
</TABLE>
NET SALES
Net sales increased in each of the seven quarters ended December 31, 1999.
Net sales increased to $1.2 million for the quarter ended December 31, 1998
compared to $139,528 for the quarter ended September 30, 1998. This increase in
net sales was principally due to the commercial launch of our Web site in
October 1998 and increased Web site traffic from an aggressive VHS movie and
compact disc product promotion in December 1998. Net sales increased to $7.1
million for the quarter ended September 30, 1999, as the result of aggressive
marketing activities, and the introduction of 800.COM as a key anchor tenant on
the America Online shopping site in late August 1999. Net sales increased to
$13.5 million for the quarter ended December 31, 1999, primarily as the result
of a major newspaper and television advertising campaign and increased Web site
traffic attributable to the holiday season.
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<PAGE> 27
COST OF GOODS SOLD
Cost of goods sold increased during each quarter as a result of increased
sales. Gross profit fluctuated widely during the seven quarters presented. This
was principally due to variations in product sales mix, promotional activities,
the mix of direct and indirect sources of inventory, pricing strategy and
inventory management. Gross profit for the quarters ended March 31, 1999 and
June 30, 1999, were negative principally due to our product mix and the use of
coupons and promotional discounts. Gross profit for the quarter ended September
30, 1999, was negative as the result of an aggressive promotion of movies and
music in July and August 1999. Gross profit for the quarter ended December 31,
1999, was positive primarily as the result of a focused effort to shift our
sales mix to higher margin consumer electronics hardware, the annual consumer
electronics holiday season shift toward sales of hardware products, and
decreased usage of coupons and promotional discounts to attract new customers.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased in all but one
of the last seven quarters through the quarter ended December 31, 1999, as we
added customer service and fulfillment capabilities, entered into online
distribution agreements and launched a national advertising campaign. Sales and
marketing expenses increased to $3.3 million for the quarter ended December 31,
1998 compared to $556,839 for the quarter ended September 30, 1998, primarily
due to the commercial launch of our Web site in October 1998 and related
customer acquisition activities. Sales and marketing expenses increased to $6.2
million for the quarter ended September 30, 1999, compared to $2.6 million for
the quarter ended June 30, 1999, principally due to increased shipping and
fulfillment costs associated with movies, music and video games sales, which
have a lower average order size, advertising agency fees, warehouse design
consulting fees and contractual fees paid to major online distribution partners.
Sales and marketing expenses increased to $21.4 million for the quarter ended
December 31, 1999, compared to $6.2 million for the quarter ended September 30,
1999, primarily due to a major newspaper and television advertising campaign
during November and December 1999.
Information Systems. Information systems expenses increased in each of the
last seven quarters ended December 31, 1999, due to increased staffing,
consultants and associated costs related to creating enhancing and maintaining
our Web site, and implementation of our order-fulfillment, inventory,
distribution and accounting systems used to process customer orders.
General and Administrative. General and administrative expenses increased
in each of the last seven quarters ended December 31, 1999, as we added to our
management team and expanded our operations to meet the requirements of a
rapidly growing business. General and administrative expenses increased to
$923,676 for the quarter ended March 31, 1999 compared to $190,627 for the
quarter ended December 31, 1998. Approximately $468,000 of this increase was
related to warrants granted to outside consultants. General and administrative
expenses increased to $861,151 for the quarter ended December 31, 1999, compared
to $793,248 for the quarter ended September 30, 1999, primarily as a result of
staff additions.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net fluctuated significantly during the last
seven quarters through the quarter ended December 31, 1999. The significant
increases in this line item during the quarters ended March 31, 1999, and
September 31, 1999, correspond with interest expense recognized on the fair
market value of warrants granted on bridge loan financings incident to our
Series B and Series C preferred stock financings. Interest expense related to
these financings totaled $382,140 for the quarter ending March 31, 1999, and
$703,723 for the quarter ended September 30, 1999. Interest income earned from
the net proceeds of these preferred stock offerings partially offset interest
expense in the quarters during and immediately following the offerings.
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<PAGE> 28
FLUCTUATION IN QUARTERLY OPERATING RESULTS
Our quarterly operating results have fluctuated in the past and we expect
they will fluctuate in the future. Because our operating results are volatile
and difficult to predict, we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future performance. If our
operating results fall below the expectations of securities analysts and
investors, the price of our common stock may decline significantly.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through the private sale of
preferred stock. During the fiscal year ended March 31, 1999, we raised $19.5
million from the sale of Series A and Series B preferred stock, and during the
nine months ended December 31, 1999, we raised $57.6 million from the sale of
Series C preferred stock. In March 2000, we raised $ million from the sale
of Series D preferred stock.
During the fiscal year ended March 31, 1999, and the nine months ended
December 31, 1999, net cash used in operating activities was $10.0 million and
$44.9 million, respectively. Net cash used in operating activities during the
fiscal year ended March 31, 1999, primarily consisted of increases in
inventories and net losses, and, to a lesser extent, increases in prepaid
expenses and accounts receivable. These items were partially offset by increases
in accounts payable, accrued liabilities, non-cash compensation expense charges,
depreciation and amortization. Net cash used in operating activities during the
nine months ended December 31, 1999, primarily consisted of an increase in
inventory and an increase in our net loss resulting from expanding our
infrastructure to support sales growth.
During July 1999, we entered into a marketing agreement with America
Online, the leading Internet service provider. Over the 24-month term of this
agreement, we are obligated to make minimum payments totaling $9.9 million to
America Online. The agreement establishes us as a preferred America Online
provider of consumer electronics on the America Online Network, America Online's
Web site, Compuserve and Netscape-Netcenter. In addition, America Online is
required to promote and advertise 800.COM on a non-exclusive basis in online
areas controlled by America Online specified in the agreement. Under the
agreement, America Online has committed that America Online users will annually
access the online areas promoting 800.COM a specified number of times.
We currently anticipate that the balance of the net proceeds from this
offering, current cash balances and cash equivalents will be sufficient to meet
our working capital and capital expenditure needs for at least the next 12
months. We plan to use the net proceeds primarily to fund operating losses and
an expansive marketing campaign. We may need to raise additional funds in less
than 12 months if, for example, we experience operating losses that exceed our
current expectations. If we raise additional funds through the issuance of
equity, equity-related or debt securities, these securities may have rights,
preferences or privileges senior to those of the rights of our common stock and
our shareholders may experience additional dilution. We cannot be certain that
additional financing will be available to us on favorable terms when required,
or at all. See note 8 of notes to our financial statements for a description of
our currently outstanding preferred stock and see "Related Party Transactions"
for a description of transactions with affiliates with respect to our preferred
stock.
25
<PAGE> 29
BUSINESS
OVERVIEW
We are a leading online specialty retailer of consumer electronics and
related products. We offer a value-added shopping experience for consumer
electronics that we believe is superior to our competitors. As an authorized
retailer for over 60 of the most widely-recognized consumer electronics brands,
we feature a broad selection of consumer electronics, including televisions, DVD
players, VCRs, home stereo equipment, digital cameras, portable stereos,
personal CD players, MP3 players, car audio, telephones, other communications
products and accessories. We offer our products in combination with detailed
product specifications and decision support tools, extensive information and
content, knowledgeable consultation and support, and superior customer service.
INDUSTRY BACKGROUND
Growth of the Internet and Online Commerce
The Internet has emerged as a global mass medium, enabling millions of
people to obtain and share information, and conduct business electronically.
International Data Corporation (IDC) estimates that the number of Internet users
worldwide will increase from 196 million in 1999 to 502 million in 2003. As
Internet usage grows, the amount of online commerce is expected to increase at
an even greater pace. According to IDC the total amount of commerce conducted
over the Internet will increase from $111.4 billion in 1999 to over $1.3
trillion by 2003, and Forrester Research estimates that business to consumer
sales over the Internet will increase from $20 billion in 1999 to $144 billion
by 2003.
The Market for Consumer Electronics
The consumer electronics market encompasses a broad selection of products
including televisions, DVD players, VCRs, home stereo equipment, digital
cameras, portable stereos, personal CD players, MP3 players, car audio,
telephones, other communications products and accessories. Based on our analysis
of data reported by the Consumer Electronics Association and published in
January 2000, by TWICE, the leading consumer electronics trade publication, we
believe the U.S. retail market for consumer electronics, excluding personal
computers, will exceed $75 billion in calendar year 2000, representing over 5%
growth from 1999.
We believe that the emergence of new digital technologies such as DVD,
HDTV, MP3 and DSS is fueling strong growth for the consumer electronics
industry. In addition, we believe a strong economy, an aging population of
affluent "baby-boomers," low interest rates and increasing discretionary income
are driving increased consumer demand. With the rapid growth of electronic
commerce, a growing portion of the consumer electronics retail market is moving
to the Internet. Jupiter Communications estimated in a report dated January
2000, that the U.S. online consumer electronics market, excluding personal
computers and related products, will grow from $400 million in 1999 to $2.1
billion in 2003, representing a compound annual growth rate exceeding 51%.
Authorized retailers have traditionally sold higher-quality consumer
electronics, other than personal computers, at attractive product margins.
Manufacturers have facilitated these margins by providing consistent pricing
advertising allowances and suggested minimum advertised price (MAP) policies.
MAP policies outline recommended prices at which authorized retailers should
advertise each model. Authorized retailers are always free to set their own
prices, but if they advertise below MAP they will, in most cases, be denied
advertising allowances.
Industry Dynamics
Unlike industries that rely on large, third-party distributors,
higher-quality consumer electronics are primarily distributed directly from the
manufacturer to the retailer. Reliable and consistent access to
26
<PAGE> 30
product, therefore, depends upon a retailer's ability to source directly from
the manufacturer. In order to establish these relationships, retailers must go
through the difficult process of gaining manufacturer authorization.
Manufacturer authorizations are critical to consumer electronics retailers
because manufacturers permit the majority of their products to be sold only
through authorized channels. In order to protect their products and brands,
manufacturers have traditionally chosen to authorize only those retailers that
adhere to a set of pre-determined standards for customer service, fulfillment,
advertising and distribution that are designed to help manufacturers meet their
goals regarding sales volume, customer satisfaction and brand building. As an
incentive, dealers are often offered significant benefits, including superior
access to product, consistent pricing, purchasing discounts, dedicated account
personnel, employee training programs, and access to promotional and marketing
incentives. The difficult process of obtaining manufacturer authorization may,
in some cases, take in excess of two years. Once granted, these authorizations
can be easily revoked, including for violations of MAP policies.
We believe higher-quality consumer electronics generally yield higher
product margins. Manufacturers generally authorize only those retailers that
have the skills to properly position their products and provide pre- and
post-sales support at levels proportional to the complexity of specific
products. Unlike specialty retailers who may have access to the full breath of a
manufacturer's product line, many mass-market retailers are authorized to carry
only a manufacturer's lower-margin commodity products.
Challenges Facing Consumers
Shopping for consumer electronics is a complex, multi-step process that
often requires significant research, education and comparison before a
transaction takes place. Consumer electronics are available from many
manufacturers, each of which offers numerous models with varying levels of
features and product quality over a wide range of costs. In addition, with the
rapid pace of technological change in the industry, it often is difficult for
consumers to remain educated about consumer electronics or assess the
compatibility of new products with their existing equipment. For example,
emerging standards in audio and video performance rapidly may render existing
products undesirable or obsolete. Similarly, a consumer wishing to purchase a
DVD player with Dolby Digital(TM) audio capability may be uncertain as to
whether or not an existing home theater system will support the audio, video,
connectivity or size requirements of the new product. We believe that consumers
are often frustrated by consumer electronics retailers that do not adequately
assist them with these complex purchasing decisions.
The traditional consumer electronics retail channel is fragmented, and
includes mass merchant retailers and discount stores such as Sears and Wal-Mart,
regional or national chain stores such as Best Buy and Circuit City, mail order
catalogs such as Crutchfield's and local specialty shops. Mass merchant
retailers and discount stores often offer attractive pricing on the products
they carry, however, they typically offer only a limited selection of low-end
products and lack trained, knowledgeable sales people. Regional or national
chain stores may carry some high-end products within the limited space of their
stores, but may lack experienced and knowledgeable sales people capable of
delivering satisfactory customer service. Mail order catalogs offer convenience
and protection from high-pressure sales people, but typically focus on one
specific category, and are limited by catalog space constraints in offering
either extensive selection or in-depth product information. Specialty stores
such as home audio and video shops may offer better customer service than other
store-based retailers, but may have higher prices and a narrower selection. As a
result of these factors, we believe that the traditional retail channel for
consumer electronics fails to satisfy consumer demand for selection, product
information, expert advice, personalized service and convenience.
Challenges Facing Manufacturers
In addition to the problems faced by consumers, the traditional consumer
electronics retail channel presents significant limitations for manufacturers.
Traditional retailers cannot offer manufacturers unlimited shelf space and
manufacturers have often felt under-served by existing channels that they
believe do not
27
<PAGE> 31
effectively communicate their marketing messages or appropriately position their
products. Furthermore, unsatisfactory customer service or inadequately trained
sales people provide inadequate support for valuable manufacturer brands. In
addition, some traditional retailers may discount below MAP policy or sell into
unauthorized channels of distribution. As a result, traditional retailers may
limit manufacturers' ability to meet their revenue and market share objectives
and to protect the positive perception of their brands.
Given the limitations of the traditional consumer electronics retail
channel, we believe that the opportunity exists to create a more compelling
solution. By leveraging the Internet and its unique characteristics, we believe
800.COM represents a superior solution for both consumers and manufacturers.
THE 800.COM SOLUTION
800.COM is a leading online specialty retailer of consumer electronics and
related products. Our approach to the consumer electronics market is that of a
value-added retailer. We add value to the shopping experience by offering in one
place a broad selection of products, detailed product information and reviews,
decision support and product comparison tools and product experts available for
pre-sale consultation and post-sale installation support. The core belief of
value-added retailing is that when consumers are presented with better brands
and technologies in an understandable format and convenient environment, they
will aspire to purchase these better products.
We offer a broad selection of high-quality, brand-name products at
competitive prices in a respectful, objective and information-rich environment.
We provide consumers with a satisfying, highly-interactive online experience
that enables them to discover, evaluate, compare and purchase high-quality
consumer electronics. The customer shopping experience is also enhanced by
offering easily understood, up-to-date product information and low-pressure
personalized consultation to guide shoppers through the buying process at their
own pace. This is especially important for complex products like consumer
electronics, where the purchase decision is more involved and requires more
information, comparison and consideration than a commodity product. Furthermore,
800.COM combines state-of-the-art technology with merchandising expertise to
provide consumers with many of the sensory benefits of shopping in a physical
store. We also strive to provide a sense of community not found at traditional
consumer electronics retailers.
The principal advantages of our model include:
Value-Added Shopping Services. We have designed a specialized, online
shopping environment that brings together all of the elements necessary for a
consumer to make an informed and satisfying purchase decision, including:
- Detailed Product Specifications and Decision Support Tools. We feature
extensive information on our products, including product descriptions,
high-quality product pictures, and technical specifications. Our Web site
technology allows consumers to generate comparison charts that map the
features of specific products in an easy to understand table. In
addition, consumers may zoom in on and rotate many product images to
better understand their features, connections and construction.
- Extensive Information and Content. Our Web site contains extensive
product information to assist consumers through every stage of the
purchasing process, from early investigation and research to
post-purchase questions and problem solving. We provide centralized
access to comprehensive product information, including detailed
information from manufacturers, expert advice and consumer reviews. We
currently employ a staff of industry veterans who write articles for the
Web site, respond to e-mails and answer customer service questions.
- Knowledgeable Consultation and Support. Our service representatives
receive extensive training both internally and from manufacturer programs
in order to provide consumers with the highest level of support. In
addition, our knowledgeable and professionally trained staff is available
online or offline, seven days a week, to answer questions and provide
guidance during the buying cycle and to provide post-sale support for
product installation and use.
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Broad Selection of Authorized Products. We offer consumers convenient
one-stop access to an authorized selection of brand name televisions, DVD
players, VCRs, audio components, camcorders, digital cameras, telephones,
electronic accessories and other consumer electronics products. As an online
retailer, we are able to offer our merchandise without shelf-space limitations,
store-layout constraints or floor-model expenses faced by traditional retailers.
As a result of our strong relationships with leading consumer electronics
manufacturers, we are authorized to offer a broad spectrum of products from
manufacturers of over 60 of the most widely recognized consumer electronics
brands including Sony, Pioneer, Sharp, RCA, Zenith, Toshiba, Philips, JBL,
Kenwood, Sanyo and Olympus. Our status as an authorized retailer provides a
number of advantages, including reliable access to product inventory,
manufacturer resources for training and support, consistent pricing and more
predictable product margins, purchasing efficiencies, promotional incentives and
information sharing for marketing purposes. Customers benefit from the breadth
of our product line, access to our manufacturer trained customer service
representatives and the ability to return merchandise to us for return to the
manufacturer.
Control of Fulfillment and Distribution. We have invested significant
resources to create our own fulfillment, distribution and customer service
functions, rather than outsourcing these functions to a third party. Our control
of these operations in-house enhances our ability to gain manufacturer
authorizations, carry a customized assortment of products, improve product
margins, reduce shipping and handling costs and shorten delivery times, all of
which contribute to high customer satisfaction through better service.
Commitment to Full Service Retailing. A full service approach is a key
aspect of every phase of our business. Although all retailers profess a
dedication to customer service, we believe that specialty retailers of complex
products, such as consumer electronics, need a different approach than commodity
sellers. Minimizing the stress of a difficult purchasing decision is critical to
our ability to acquire and retain customers. Our customer service approach
blends a customer-oriented philosophy with talent and technology necessary to
deliver service tailored for the complex products that we sell. Our approach has
been validated by strong customer satisfaction ratings reported by BizRate, an
independent market research company, based on customer surveys they conducted
related to over 50,000 purchases from our online store.
THE 800.COM GROWTH STRATEGY
Our goal is to be the leading value-added online specialty retailer of
consumer electronics by bringing together all of the elements necessary for a
consumer to make an informed and satisfying purchase decision. To reach this
goal, we are implementing a strategy that includes the following key elements:
Aggressively Building Our Brand. We intend to establish 800.COM as the
leading brand and trusted source for buying consumer electronics and related
entertainment products over the Internet. We intend to position the 800.COM
brand to represent a fundamentally new way to shop for complex goods and
services. Through our advertising campaigns, promotional activities and
strategic relationships, we plan to generate brand awareness and drive customer
traffic to our Web site.
Promoting Repeat Purchases. We are focused on promoting customer loyalty
and building repeat purchase relationships with our customers. We intend to use
our database of customer purchasing history, direct marketing techniques and
customer feedback to effectively target existing customers, tailor Web site
features to individual customers and enhance our customer service and product
offerings. The informational and community resources on our Web site,
customer-only promotions, and availability of goods that complement our core
consumer electronics products, such as movies, music and video games, all
encourage regular visits from our customers.
Maintaining and Expanding Our Authorized Dealer Status. We plan to continue
our focus on consumer electronics and dedication to customer service in order to
add to and enhance our manufacturer authorizations. We believe our commitment to
customer service and satisfaction played a deciding role in the selection of
800.COM as the first Internet-only authorized retailer for both Sony
Electronics, Inc. and
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Pioneer USA. We are currently an authorized retailer for over 60 of the most
widely recognized consumer electronics brands. As our sales volume and support
infrastructure continue to grow, we expect these relationships to continue to
develop and yield further advantages. We believe the process of gaining
manufacturer authorization will inhibit or slow the entry of potential
competitors.
Enhancing the Online Shopping Experience. We are committed to the seamless
integration of product offerings with relevant content, community and services.
Offering superior customer service and continually improving our communications
with customers are among our top priorities. We will continue to enhance our
technological and operational infrastructure in order to improve the speed,
functionality and security of our online store. For example, our comparison tool
enables consumers to easily generate a table contrasting the features of
multiple products within a category. We expect to continue to introduce
innovative and advanced decision support tools. In addition, we continue to add
sales and service representatives who possess a blend of traditional skills and
provide them leading-edge communications tools that permit them to assist and
advise customers while they shop in our online store.
Continuing Our Focus As a Value-Added Service Retailer of Consumer
Electronics. We intend to capitalize on our customer base, brand name,
merchandising expertise and distribution capabilities to become the primary
place for consumers to purchase consumer electronics and related entertainment
products. Consumer electronics retailing has unique requirements uncommon to
other retailers. We believe that the sale of consumer electronics cannot be done
well without an exclusive focus. We intend to continue to focus on consumer
electronics and related entertainment products.
THE 800.COM ONLINE EXPERIENCE
Our online store offers consumers a convenient, informative, secure and
enjoyable shopping experience. Shoppers on our Web site can, from their home or
office, browse for specific products, conduct targeted searches, gather
information, interact with other customers or our expert staff, view special
promotion items, visit their personalized shopping page, order products and
check order status. We believe that our full-service, value-added approach to
online retailing significantly improves our ability to sell complex, premium
quality consumer electronics products. We also believe that the comprehensive
product information we make available to consumers significantly increases
customer satisfaction and loyalty while reducing product return rates.
Our Online Store Departments
We categorize our products and services into several different departments,
which are briefly described below.
Electronics Department. We are focused primarily on the sale of consumer
electronics. We are an authorized retailer for manufacturers of over 60 of the
most widely-recognized consumer electronics brands such as Sony, Pioneer, Sharp,
RCA, Zenith, Toshiba, Philips, JBL, Kenwood, Sanyo and Olympus, and
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offer over 1600 consumer electronics products at a full-range of price points.
Our electronics department is divided into product categories and subcategories,
some of which are listed below:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
PERSONAL PHONES/
CATEGORIES VIDEO AUDIO DIGITAL ELECTRONICS CAR AUDIO COMMUNICATION ACCESSORIES
CAMERAS
- ------------------------------------------------------------------------------------------------------------------------------
SUB- Televisions Systems Digital Personal CD Players Cordless AC Adapters
CATEGORIES Cameras Stereo Phones
DVD Players Receivers CD Changers Antennas
Memory Personal CD Corded Phones
TiVo/ Preamps/ Cards Players Cassette Blank tapes/
Replay TV Processors Players Answering discs
Peripherals Radios Machines/
VCRs Amplifiers Amplifiers Caller ID Cables
MP3
Camcorders Equalizers Speakers Two-Way Furniture
Clock Radios Radios
Satellite CD Players Headphones
Systems Portable
Tape Decks MiniDiscs Remote
Web TV Controls
MiniDiscs
Storage/Bags
Speakers
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As an online retailer, we are able to effectively merchandise our broad and deep
assortment of brand name consumer electronics in a customer-friendly and
information-rich environment.
Movie, Music and Games Departments. As a complement to our consumer
electronics products, we offer movies in DVD and VHS formats, music in compact
disc and cassette formats and video games. As of December 31, 1999, we stocked
over 187,000 movie titles, 42,000 music titles and 240 video game titles. In
addition to purchasing currently available titles, customers can pre-order
products in order to obtain them upon release. In each of these departments, we
highlight best sellers, new releases and special promotions. We also provide
reviews and recommendations. Our movie, music and game departments offer
merchandise that drives traffic to our online store and presents cross-selling
opportunities for our consumer electronics.
Forums. Our forums are designed to foster a sense of community among
consumers who can participate in discussions on various topics, such as home
theaters, DVD players, digital cameras, music or movies.
Customer Service. By selecting Customer Service, consumers access
information on how the customer can contact our customer care center by
telephone, e-mail or mail. Live online help is also available from most product
pages in the online store. There is also information on our policies for product
returns, shipping, price matching, order handling, privacy protection, security
and sales taxes. Customers can also access a personalized, password-protected
Web page to review prior purchases, track pending orders, and organize "wish
lists" for sending to relatives and friends.
Shopping at 800.COM
A special characteristic of the consumer electronics market is that most
consumers go through a multi-step, often multi-session sales cycle. It is common
for a consumer to investigate a single purchase by visiting our site three or
more times over a three week period. Before making a final purchase decision,
the consumer may gather information in a variety of ways, including browsing our
Web site, or contacting one of our experts by e-mail, telephone or online
instant chat. Even though each session is a distinct interaction with the
consumer, the consumer views them as a single conversation transpiring over the
length of the sales cycle. Therefore, the challenge is to track these activities
so that we can respond to the consumer with complete knowledge of all prior
interactions. To meet this challenge, we have architected an infrastructure that
can track this multi-step, multi-session, multi-channel sales cycle and preserve
the integrity of all of our prior communications with the consumer to ensure
optimal convenience and quality of service.
Our online store is designed to efficiently address consumers' needs in
each stage of this process and also to provide effective, post-sales support, as
described below.
Interest. We believe that the buying cycle begins with generating consumer
interest in a particular product on our Web site. To develop this interest, we
place online and offline advertisements, use value-
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added promotions, enter into strategic relationships with portals and online
partners, and market directly to our existing customer base. For example, we
notify our existing customers and other consumers when there is news regarding
the latest product offerings from manufacturers or when we open new departments
in our online store, such as custom stores that feature products from a single
manufacturer. In addition, our department home pages feature presentations that
showcase selected products of special interest to consumers, including new
technologies, special purchases and limited time offers. We frequently remind
customers and other consumers of the every day benefits of shopping at 800.COM,
for example that we do not collect sales taxes, as well as limited time offers,
such as free shipping.
Investigation and Research. After becoming interested in a product, a
consumer generally will research that product and competing brands and models.
For complex products, the amount of research is likely to be extensive. Our
online store offers consumers a variety of product categories arranged in a
simple, easy-to-use format intended to enhance product research and selection.
From a department home page, customers can link directly to a product category,
such as video, or a subcategory, such as DVD players. Subcategory home pages are
"solution-centers," offering, within the subcategory, educational modules and
other background materials, as well as links to product pages, related
accessories and cabling information, where appropriate. In addition, consumers
may access a variety of information from manufacturers and industry experts,
including articles, industry news and buying guides.
Reference. Consumers often desire to confirm their research by
communicating with other consumers regarding their views of or experiences with
a particular product. Our discussion forums, consumer reviews and customer
ratings facilitate these reference activities. Consumers who pose a question on
a forum often receive one or more responses from other consumers within 24
hours. In addition, our professionally-trained staff is available online and
offline to answer questions and provide guidance and recommendations.
Selection. Each product on our Web site is represented by an individual
product page, which includes detailed specifications provided by the
manufacturer, followed by a non-technical explanation of each relevant feature.
To aid in the selection and decision-making process, we provide a sophisticated
comparison tool that enables the consumer to generate a product comparison table
that specifies availability, pricing, features, cabling requirements, if
appropriate, and physical specifications for the selected products. For many
products, the consumer can also choose to zoom in on and rotate product images
to better understand their features, connections and construction. Finally, the
consumer can engage a trained product specialist in a live, online chat session
by clicking the "online support" button on each product page, which connects the
customer to our call center.
Acquiring the Product. Our fully-integrated inventory system allows us to
notify customers in real-time whether a selected product is currently in stock.
To place an order, the customer clicks the "checkout" button and, depending upon
whether the customer has previously shopped with us, is prompted to supply
shipping details online. We indicate shipping options and schedules during the
checkout process. Before making a final purchase decision, customers can add and
subtract products from their virtual shopping cart as they browse through our
online store. Prior to finalizing an order, customers are shown their total
charges and selected options, at which point they have the ability to change,
confirm or cancel their order.
Paying and Confirmation. To pay for orders, customers must use a credit
card. The credit card is authorized during the checkout process, but is charged
only when we ship the purchased item from our fulfillment facility. Our online
store uses an encryption security technology that works with the most common
Internet browsers and makes it virtually impossible for unauthorized parties to
read information sent by our customers. Our system automatically confirms
receipt of each order via e-mail within minutes and notifies the customer when
we ship the order, which is typically within 24 hours for in-stock items.
Customers can check the status of their orders online using a designated
tracking number.
Post-Purchase Support. Our highly-trained support staff is available seven
days a week by instant messaging, e-mail or toll-free telephone to provide
expert set-up, installation and other assistance. In addition, our Web site also
offers tips on using particular features of products. Products that generate the
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most post-sale interactions with the customer care center, such as DVD players,
audio/video receivers and large screen televisions, are added to our after care
program. The after care program sends an introductory e-mail to purchasers of
such products that reminds them that our customer care center is available for
installation assistance and problem resolution.
Warranties and Returns. In addition to manufacturers' warranties, we offer
customers further product protection by selling them performance guarantees from
National Electronics Warranty, the leading independent provider of extended
service contracts. We maintain a money-back return policy for products purchased
directly from our online store that are returned within thirty or, for certain
products, seven days. Because we are an authorized retailer for most products,
we are generally able to return to the manufacturer those products returned to
us.
PRODUCT SOURCING AND MERCHANDISING
We strive to purchase our consumer electronics directly from manufacturers,
rather than through third-party distributors. In addition, we seek manufacturer
authorization to sell products that we source from third-party distributors. We
have been highly successful in pursuing this strategy. We are authorized for
almost all of our consumer electronics products, including products from the
manufacturers of the following brands:
- Acoustic Research
- Action
- Advent
- AGFA
- Argus
- Audiobahn
- AudioSource
- Audiovox
- Bazooka
- Bell'oggetti
- Canon
- Case Logic
- Cerwin-Vega
- Cobra
- Computer Expressions
- Diamond
- Discwasher Digital
- Fisher
- Fuji
- Funai
- General Electric
- Go.video
- GPX
- - Grundig
- - Harman/Kardon
- - Hitachi
- - JBL
- - Jensen
- - Kaser
- - KB Gear
- - Kenwood
- - Kinyo
- - KLH
- - Konka
- - Koss
- - Lexar
- - Monster Cable
- - Motorola
- - Olympus
- - Oritron
- - Philips
- - Philips Magnavox
- - Pioneer
- - RCA
- - Recoton
- - Replay
- - Ricoh
- - Samsung
- - Sanyo
- - Sennheiser
- - Sensort Science
- - Sharp
- - Sherwood
- - Sony
- - Skipdoctor
- - Sylvania
- - Symphonic
- - TDK
- - Terk
- - Toshiba
- - Ultimate
- - Uniden
- - Vtech
- - Yamaha (headphones, keyboards)
- - Yorx
- - Zenith
The advantages of these relationships include:
- Access to Product Inventory. Many manufacturers supply the majority, and
in some cases all of their higher-quality products, directly to their
authorized retailers.
- Consistent Pricing. Authorized retailers can generally rely on a
consistent price for their direct purchases from manufacturers. Pricing
typically improves as volume increases.
- Promotional Incentives. The availability of volume rebates, co-op
advertising allowances and other discounts make direct purchasing highly
advantageous to retailers from a cost perspective and further increases
the historically stable margins in the consumer electronics market.
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- Resources for Training and Support. In most cases, manufacturers send
factory representatives to train our service personnel to ensure that we
are qualified to fully support their products.
- Access to Market Information. Direct relationships also foster a more
cooperative, less adversarial interaction with the supplier. This often
results in significant advantages from information sharing, such as
information regarding new product scheduling, price moves and competitive
factors.
We believe that our purchasing strategy benefits both consumers and
suppliers by offering an alternative to the conventional consumer electronics
distribution model. Our expanded selection of consumer electronics, competitive
prices, and outstanding pre- and post-sales customer support lead to a high
level of customer satisfaction and enhance the brands of our suppliers. We
believe that our continued dedication to value-added online retailing of
consumer electronics is the best method of maintaining our leadership position
in this market and our beneficial relationships with suppliers.
Our merchandising strategy incorporates both product sourcing and product
presentation on our Web site. Our merchandising team has the primary
responsibility for product selection, inventory levels and pricing.
Merchandising decisions are supplemented by our information systems, which
monitor inventory levels and product sales. Our merchandising team continuously
reviews new and existing products and market trends in order to meet consumer
demand and adjust our product mix.
Effective product presentation on our Web site is an essential aspect of
value-added retailing. Our Web site gives us significant flexibility in our
ability to enable consumers to easily select, sort and compare a broad and deep
assortment of brand name products. Our merchandise categories are presented on
our Web site by "solution center" pages that feature primers and other product
category information, as well as links to product pages, related accessories and
cabling information as appropriate. Within the product categories, we feature
presentations that showcase selected products new technologies, special
purchases and limited time offers.
MARKETING AND PROMOTION
Our marketing strategy focuses on establishing 800.COM as the leading brand
and trusted source for buying consumer electronics and related products over the
Internet.
Brand Building
We are devoting substantial effort and expense to establish 800.COM as the
most widely recognized brand for online specialty consumer electronics
retailing. Our brand building efforts primarily target well-educated, affluent
men between the ages of 25 and 49, who are the traditional purchasers of
consumer electronics.
In the fourth quarter of calendar 1999, we launched our first major
brand-building campaign. This program consisted of a combination of offline
advertising vehicles such as television, radio, print advertising and
sponsorships. Our national and regional television advertising, targeted
activity in markets with a high level of both consumer electronics sales and
Internet penetration. We also use extensive online advertising to promote both
our brand name and specific product offerings and promotions on a wide variety
of Web sites. These online properties include major content and service
providers such as America Online and the Microsoft Network, as well as
special-interest sites focused on our target demographic. Our online advertising
consists of a combination of banners, text links, editorial placement and anchor
tenancy on selected Web sites.
Customer Acquisition
To direct traffic to our online store, we have created numerous links that
permit potential customers to connect directly to our Web site from other Web
sites. We strive for widespread and strategic positioning of these links.
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- Marketing Alliances. We seek marketing alliances with prominent Internet
portals and others that can demonstrably attract customers to our online
store, such as our alliances with America Online and Microsoft Network.
We entered into a two-year agreement with America Online in July 1999 and
a one-year agreement with the Microsoft Network in November 1999. The
America Online agreement provides us with an anchor tenancy as a
preferred provider of consumer electronics on the America Online Network,
America Online's Web site, Compuserve and Netscape-Netcenter. The
Microsoft Network agreement provides us with similar placement on the MSN
Shopping Web site. In addition, users searching for consumer electronics
products who click on specific content areas and keywords within America
Online and the Microsoft Network are directly linked to our online store.
- Affiliate Program. We increase our reach and exposure on the Internet by
continuing to add to the network of over 22,000 companies in our
affiliate program. These companies receive referral fees or participate
in revenue sharing when links from their Web sites to our online store
generate sales for us. In exchange for providing the technology to
administer our affiliate network, BeFree, Inc. receives a 2% commission
for each affiliate sale in addition to the fee we pay to the referring
site.
Customer Retention
We use our database of prior purchases and visits to personalize content
for returning customers. For example, we can identify returning customers and
recommend products that they may be interested in based upon their history of
previous purchases. If authorized by the customer, we also use this information
for customer-only special promotions to improve the efficiency of our online
direct marketing campaigns. We further build customer loyalty through post-sales
contact to determine if customers are satisfied with their purchases and to
offer installation and set-up assistance.
CUSTOMER CARE
Due to the complex nature of the consumer electronics products we sell, a
high level of customer care is critical to both retention of our existing
customer base and acquisition of new customers. We constantly make changes to
improve customer service based on feedback solicited from customers through our
Web site and through our relationship with BizRate, a market research firm that
surveys our customers.
We strive to fully support the buying process by offering a high level of
both pre- and post-sale customer support. We conduct a regularly scheduled
program of internal training for our customer care representatives and we
monitor phone and e-mail communications from time to time to insure high
standards of customer service. Our in-house customer call center, which is
staffed 14 hours per day, Monday through Friday, and 10 hours per day on
weekends, features two levels of customer support. Customers can contact our
first-level customer care representatives by a toll-free telephone call or by
e-mail.
Our second level product specialist group consists of service
representatives with advanced training in consumer electronics. Many of these
product specialists are seasoned industry veterans. In addition to internal
training programs, major consumer electronics suppliers train our product
specialist group on a regular basis. The product specialists are available to
answer customer questions, provide product operation and configuration
assistance and to help troubleshoot customer problems. Product specialists are
available via our toll-free number, by e-mail, or by live online chat session.
We strive to keep telephone hold and chat session waiting times under two
minutes and to respond to all customer inquiries within 24 hours.
Our service representatives have access to a database of previous
interactions between the customer and the customer call center, regardless of
whether the previous response was by telephone, fax, e-mail or chat. This
historical information facilitates continuity in the customer's relationship
with the call center. Service representatives are also supported by our
searchable product database, which contains in-depth product information.
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Customer service does not end with the sale of a product. Purchasers
receive post-sale e-mail messages to confirm orders and shipments. For many
products, customized wiring diagrams and installation instructions are
generated. Customers can also contact the customer call center for expert set-up
and installation assistance.
In addition to the customer call center, we have developed a sophisticated
and intuitive self-help environment within our online store. For example,
customers can easily generate customized product comparison tables and track
their own orders, including shipping information. Our Web site also contains
detailed explanations of our policies concerning shipping, returns, privacy and
security.
FULFILLMENT
We believe that operating our own customer fulfillment center is essential
to our strategy. Our control of these operations in-house improves our ability
to gain manufacturer authorizations, carry a customized assortment of products,
improve product margins, reduce shipping and handling costs and shorten delivery
times, all of which contribute to high customer satisfaction through better
service. We have contingency plans to temporarily outsource portions of
fulfillment, as well as other operations, in the event our growth exceeds our
internal capabilities.
The customer fulfillment center receives consumer electronics and movie,
music and game software inventory from a variety of large and small
manufacturers and distributors. Orders placed on our Web site are communicated
to our warehouse management computer system, which transmits pick, pack and ship
information to the customer fulfillment center over a secure connection. Picking
is accomplished by an internally developed system which utilizes pick documents
and hand-held wireless data scanners. Multiple manual packing and shipping
stations handle larger consumer electronics products while four high-speed
automated manifesting and packaging lines handle movies, music, and video game,
as well as smaller consumer electronics products. Our warehouse distribution
system updates our central inventory management system with information on
receiving, shipping, on-hand inventory quantities, and on-hand inventory
locations. This process enables us to display shipping status and availability
for products on our Web site.
Most orders are shipped via either the U.S. Postal Service or United Parcel
Service. We contract with common carriers to deliver large televisions through
our Red Carpet Delivery program, which includes unpacking and positioning the
television and removing packaging materials. We provide our customers with
online order tracking capability through both the United States Postal Service
and United Parcel Service. We notify each customer by e-mail that an order has
been received, and send a second e-mail when the order has been consigned for
shipment. During the nine-month period ending December 31, 1999, over 95% of
in-stock items were shipped within 24 hours of order.
TECHNOLOGY
We have designed and implemented a business infrastructure that supports
our specialty, full-service, online sales model. Our strategy has been to
assemble and integrate a unique set of industry standard and proprietary
applications to automate, manage and track our business processes in real-time.
This architecture is designed to ensure that customers receive consistent and
uninterrupted support as they navigate the multi-step, often multi-session,
buying process inherent to our category. The complex architecture necessary to
guarantee integrity of the customers' data and the highest level of customer
support for the purchase of complex products contrasts sharply with the minimal
infrastructure and nominal support required for the single step sales cycle that
typifies simple, commodity products. Our architecture has also been designed to
permit flexibility in the face of changing customer needs and Internet
technologies and to scale easily as our business grows.
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We operate our own data center in Portland, Oregon. It is a secure facility
with climate control and redundant power. For Internet connectivity, we have
multiple diverse fiber connections to multiple Internet Service Providers with
extensive national network backbones.
Our Microsoft Windows NT-based Web servers use Microsoft Site Server
Commerce Edition as a foundation for over 20 proprietary and commercially
available applications, including promotion management, channel management,
product administration, content administration, community services, and customer
support delivery and tracking applications. Our back-end information systems use
an IBM AS/400 computer to automate accounting, warehouse, distribution,
inventory control, call center, credit card authorization and fraud checking,
and permit the integration of additional services provided by our manufacturers,
shipping partners and financial partners.
We use encryption to protect transactions conducted over the Internet.
Customer account and credit card information is protected by firewalls and other
security measures.
COMPETITION
We currently compete with a variety of other companies that sell consumer
electronics. Our competitors include:
- store-based consumer electronics specialty retailers, ranging in size
from a single store to regional and national chains, such as Best Buy and
Circuit City Stores;
- discount retailers and price clubs, such as Costco Wholesale and
Wal-Mart;
- department stores, such as Sears;
- catalog retailers, such as Crutchfield;
- non-specialized online retailers, such as Amazon.com, Buy.com and
Mercata, that carry consumer electronics products among their offerings;
and
- online consumer electronics specialty retailers, such as electronics.net
and ROXY.com.
We also compete with store-based and online sellers and renters of music,
movies and video games.
We believe that for commodity consumer electronics, which are typically
sold by discount retailers, price clubs and non-specialized online retailers, as
well as for music, movies and video games, the principal competitive factors are
convenience and price. We believe that the principal competitive factors for
selling higher-quality consumer electronics are customer service, selection of
brand name products, manufacturer authorizations, information, convenience and
price.
We believe that our business model, specialty focus and strong
relationships with manufacturers provide us with a substantial lead over
potential competitors that may attempt to build an online retail and fulfillment
system for complex consumer electronics products.
PROPRIETARY RIGHTS
We rely on a combination of trademark, copyright, trade secret,
confidentiality procedures and contractual provisions to protect our proprietary
rights.
The 800.COM brand is an important component of our business strategy. We
have registered the 800.COM logo in the United States and Australia, and
applications are pending in numerous foreign jurisdictions. We have applied for
trademark registration for the "800.COM" in the United States and numerous
foreign jurisdictions.
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Our software, reference materials, advertisements and other written
materials are protected by international and United States copyright laws. We
treat the source code for all internally developed applications and many of our
proprietary business processes as trade secrets and require all employees and
third parties who require access to the source code or processes to sign
non-disclosure agreements.
We expect to file patent applications relating to aspects of our
proprietary technology and business processes. We currently have no issued
patents.
GOVERNMENT REGULATION
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, freedom of expression, pricing,
content and quality of products and services, taxation, advertising,
intellectual property rights and information security. The nature of this
legislation and the manner in which it may be interpreted and enforced cannot be
fully determined and, therefore, this legislation could subject us to potential
liability, which in turn could harm our business. The adoption of any such laws
or regulations might also decrease the rate of growth of Internet use, which in
turn could decrease the demand for our products and services, or increase the
cost of doing business, or otherwise harm our business, financial condition and
results of operations. In addition, the applicability to the Internet of
existing laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy is
uncertain. The vast majority of these laws were adopted prior to the advent of
the Internet and related technologies and, as a result, do not contemplate or
address the unique issues of electronic commerce.
Several states have also proposed legislation that would limit the use of
personal information gathered online or require Web sites to establish privacy
policies. The Federal Trade Commission has also initiated action against at
least one Web site regarding the manner in which information is collected from
users and provided to third parties. Changes to existing laws or the passage of
new laws intended to address these issues, including some recently proposed
changes, could create uncertainty in the marketplace that could reduce demand
for our products or services, increase the cost of doing business as a result of
litigation costs or increased service delivery costs. In addition, because our
products and services are accessible throughout the United States, other
jurisdictions may claim that we are required to qualify to do business as a
foreign corporation in a particular state. We are qualified to do business in
Oregon. Our failure to qualify as a foreign corporation in a jurisdiction where
we are required to do so could subject us to taxes and penalties for the failure
to qualify and could result in our inability to enforce contracts in those
jurisdictions. Any new legislation or regulation of this kind, or the
application of laws or regulations from jurisdictions whose laws do not
currently apply to our business, could harm our business, financial condition or
results of operations.
EMPLOYEES
As of December 31, 1999, we had 125 full-time employees, including 58 in
operations, which includes both our customer care center and fulfillment center,
32 in sales and marketing, 21 in information services, and 14 in executive
management and administration. We devote, and will continue to devote,
substantial resources to attract high-quality employees and build a strong
corporate culture that encourages and rewards success. We believe that our
investments in recruiting and training help us attract and retain key managers
and productive employees. None of our employees is represented by a labor union.
We have never experienced a work stoppage and we consider our employee relations
to be good.
FACILITIES
Our corporate offices and fulfillment center are located in Portland,
Oregon. We rent approximately 38,000 square feet for our corporate offices under
a 5-year lease that expires in March 2004, with an
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<PAGE> 42
option to renew for two additional 5-year terms. We rent approximately 210,000
square feet of warehouse space for our fulfillment center under a lease that
expires in March 2001, with an option to extend the lease to September 2004. We
also have the right to expand the fulfillment center into an additional 100,000
square feet adjacent to our current space.
LEGAL PROCEEDINGS
From time to time we are involved in litigation incidental to the conduct
of our business. We are not currently a party to any lawsuit or proceeding that,
in our opinion, is likely to seriously harm our business.
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<PAGE> 43
MANAGEMENT
EXECUTIVE OFFICERS, OTHER KEY MEMBERS OF MANAGEMENT AND DIRECTORS
Our executive officers, other key members of management and directors, and
their ages and positions, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gregory L. Drew(1)............. 46 Chairman of the Board, Chief Executive Officer and
President
Robert S. Falcone.............. 53 Senior Vice President, Chief Financial Officer and
Secretary
Frank Sadowski................. 47 Senior Vice President, Merchandising
Timothy Zuckert................ 35 Vice President, Chief Marketing Officer
Ken C. La Honta................ 44 Vice President, Finance
Jason Palmer................... 31 Vice President, Sales and Operations
Dave Watrous................... 41 Vice President, Information Systems
Peter G. Bodine(2)............. 37 Director
Len K. Jordan(1)............... 33 Director
Gerard H. Langeler(1)(2)....... 49 Director
James G. Shennan, Jr.(2) ...... 58 Director
Spencer C. Tall................ 38 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Gregory L. Drew founded 800.COM and has served as our Chief Executive
Officer and President since our inception in December 1997. He has also served
as our Chairman of the Board since July 1998. Prior to founding 800.COM, Mr.
Drew served briefly as QUALCOMM Incorporated's Portland site manager after
QUALCOMM acquired Now Software, Inc., a personal productivity software company,
in December 1997. From April 1996 to December 1997, he was Vice President,
Worldwide Sales and later Vice President and General Manager of the End User
Products Group of Now Software. Mr. Drew was Vice President, Worldwide Sales of
Clientele Software, Inc. a customer support software company, from September
1995 to April 1996. From August 1994 to August 1995, he served as Vice
President, Worldwide Sales of Tut Systems, Inc., a networking products company.
Mr. Drew recently was named to Oregon State Governor John Kitzhaber's Council on
the Internet.
Robert S. Falcone has served as our Senior Vice President, Chief Financial
Officer and Secretary since January 2000. From August 1990 to January 1998, Mr.
Falcone was employed by NIKE, Inc., serving as its Corporate Vice President and
Chief Financial Officer from April 1992 to January 1998.
Frank Sadowski has served as our Senior Vice President, Merchandising since
January 2000. From January 1999 to January 2000, he served as our Vice
President, Merchandising. From January 1994 to November 1998, Mr. Sadowski was
employed by Sun Television and Appliances, Inc., a regional consumer electronics
and appliance retailer, serving as the Merchandise Manager of its Audio Division
from February 1996 to November 1998.
Timothy Zuckert has served as our Vice President, Chief Marketing Officer
since July 1999. From March 1998 to July 1999, he served as Vice President of
Sales and Marketing of Disney Interactive, Inc. Mr. Zuckert was Vice President
of Marketing of The Palace Inc., a community Web site company, from April 1997
to March 1998. From December 1995 to April 1997, he was Vice President of
Marketing and later President and Chief Executive Officer of Virgin Sound and
Vision, the children's software publishing arm of the Virgin Group PLC. Mr.
Zuckert was the Director of Product Marketing for Maxis, Inc., an educational
and entertainment software company, from September 1991 until December 1995.
Ken C. La Honta has served as our Vice President, Finance since July 1999.
From July 1999 to January 2000, Mr. La Honta also served as our Chief Financial
Officer. From December 1991 to June
40
<PAGE> 44
1999, Mr. La Honta was employed by Norm Thompson Outfitters, Inc., serving as
its Senior Vice President, Finance and Chief Financial Officer from June 1997 to
June 1999, and as its Vice President and Chief Financial Officer from December
1991 to June 1997.
Jason Palmer has served as our Vice President, Sales and Operations since
February 1998. From June 1996 to February 1998, Mr. Palmer was the National
Sales Manager of the End User Products Group of Now Software. From October 1995
to June 1996, Mr. Palmer was Channel Sales Manager for Clientele Software. From
January 1995 to October 1995, he was the Senior Account Manager for Tut Systems.
From January 1992 to January 1995, Mr. Palmer served as an Assistant Manager of
Wal-Mart Stores, Inc.
Dave Watrous has served as our Vice President, Information Systems since
May 1998. From December 1995 to April 1998, Mr. Watrous was employed by Now
Software as an Information Systems Manager. From January 1986 to November 1995,
Mr. Watrous was the Technical Services Manager for Advanced Information
Solutions, Inc.
Peter G. Bodine has served as a director of 800.COM since March 1999. Since
1992, he has been a General Partner of APV Technology Partners, a venture
capital firm, and a managing member of Asia Pacific Ventures, a consulting firm.
Mr. Bodine currently serves on the board of Fatbrain.com, Inc., an online
specialty bookstore, and several privately-held companies in which APV
Technology Partners is an investor. Mr. Bodine is the brother-in-law of Spencer
C. Tall, one of our directors.
Len K. Jordan has served as a director of 800.COM since July 1998. Since
January 1997, he has served as a Senior Vice President at RealNetworks, Inc., an
Internet media delivery company. From November 1993 to November 1996, Mr. Jordan
served in various management capacities at Creative Multimedia, Inc. a developer
and publisher of CD-Rom and internet products, including as its President.
Gerard H. Langeler has served as a director of 800.COM since October 1998.
Mr. Langeler has been a General Partner of Olympic Venture Partners, a venture
capital firm, since 1992. He currently serves on the boards of Preview Systems,
Inc., an electric commerce infrastructure company, and Vascular Solutions, Inc.,
a medical device company, as well as several privately-held electronic commerce
companies in which Olympic Venture Partners is an investor.
James G. Shennan, Jr. has served as a director of 800.COM since March 1999.
From June 1989 to the present, Mr. Shennan has been a General Partner of Trinity
Ventures, a venture capital firm. Mr. Shennan has over 25 years experience in
consumer products and services marketing. Mr. Shennan also serves on the boards
of directors of the Starbucks Coffee Company, P.F. Chang's China Bistro, Inc.
and Quokka Sports, Inc., an online sports media company, as well as several
privately-held consumer and electronic commerce companies in which Trinity
Ventures is an investor.
Spencer C. Tall has served as a director of 800.COM since March 1999. Mr.
Tall is currently a General Partner of APV Technology Partners, a venture
capital firm, and a managing member of Asia Pacific Ventures, a consulting firm.
He has been affiliated with APV Technology Partners since 1996, and has held
various positions at Asia Pacific Ventures since 1992. Mr. Tall currently serves
on the boards of several privately-held companies in which APV Technology
Partners is an investor. Mr. Tall is the brother-in-law of Peter G. Bodine, one
of our directors.
BOARD COMPOSITION
Our board of directors currently consists of six members. Each director
holds office until the later of the expiration of his term or until his
successor is duly elected and qualified. Upon completion of this offering, our
articles of incorporation will provide for a classified board of directors. At
that time, our board of directors will be divided into three classes, with each
class serving staggered three-year terms. The Class I directors will stand for
election or re-election at the 2001 annual meeting of shareholders. The Class II
directors will stand for election or re-election at the 2002 annual meeting of
shareholders. The Class III directors will stand for election or re-election at
the 2003 annual meeting of shareholders. Any
41
<PAGE> 45
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible, each
class will consist of an equal number of directors.
Messrs. Bodine, Jordan, Langeler, Shennan and Tall were elected to the
board of directors pursuant to a voting agreement among 800.COM and its
principal shareholders. This voting agreement will terminate upon completion of
this offering. Each of our current directors will continue to serve on the board
of directors upon completion of this offering.
BOARD COMMITTEES
Our audit committee consists of Messrs. Bodine, Langeler and Shennan. Our
audit committee reviews our auditing, accounting, financial reporting and
internal control functions and makes recommendations to the board of directors
for the selection of independent accountants. In addition, the committee
monitors the quality of our accounting principles and financial reporting, as
well as the independence of our independent accountants. In discharging its
duties, the audit committee will:
- review and approve the scope of the annual audit and the independent
accountant's fees;
- meet separately with our independent accountants and our senior
management; and
- review the general scope of our accounting, financial reporting, annual
audit, matters relating to internal control systems and the results of
the annual audit.
Our compensation committee consists of Messrs. Drew, Jordan, and Langeler.
The compensation committee reviews and recommends to the board of directors the
compensation and benefits of our executive employees and administers our stock
plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves on the board of directors or
compensation committee of an entity that has one or more of its executive
officers serving as a member of our board of directors.
COMPENSATION OF DIRECTORS
We do not pay directors cash compensation. However, we reimburse
non-employee directors for reasonable expenses incurred in connection with their
attendance at board and committee meetings. Also, we have granted to one of our
non-employee directors options to purchase common stock, as indicated below.
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE
NAME DATE OF GRANT OF SHARES PER SHARE
---- ---------------- --------- --------------
<S> <C> <C> <C>
Len K. Jordan........................ July 15, 1998 50,000 $0.10
February 1, 2000 15,000 6.61
</TABLE>
EXECUTIVE COMPENSATION
The table below summarizes the compensation earned for services rendered to
us in all capacities for the fiscal year ended March 31, 1999, by our chief
executive officer. No other executive officers of 800.COM earned $100,000 or
more in combined salary and bonus in the fiscal year ended March 31,
42
<PAGE> 46
1999. We have not granted any stock options to Mr. Drew, nor have we entered
into any employment contract or change of control arrangement with Mr. Drew.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS
--------------------------- ----------- -------- -----
<S> <C> <C> <C>
Gregory L. Drew.................................. 1999 $112,500 $ --
Chief Executive Officer and President
</TABLE>
STOCK PLANS
1998 Stock Option Plan
Our 1998 stock option plan permits the grant of options to our employees,
officers, directors, consultants and advisors. For employees, options may be
either incentive stock options within the meaning of Section 422 of the Internal
Revenue Code or nonstatutory stock options. Nonemployees may only receive
nonstatutory stock options. As of December 31, 1999 a total of 2,478,568 shares
of common stock were authorized for issuance upon the exercise of options
granted or to be granted under the 1998 stock option plan. As of December 31,
1999, options to purchase a total of 2,107,804 shares of common stock, with a
weighted average exercise price of $2.01 per share, were outstanding under the
1998 stock option plan. Concurrently with the approval of our 2000 stock
incentive compensation plan by our board of directors, the 1998 stock option
plan will be capped at the number of options then outstanding and no further
options will be granted under the 1998 stock option plan. The 1998 stock option
plan provides that if we are involved in any merger, consolidation or
reorganization in which we are not the surviving corporation, each outstanding
option will terminate except to the extent assumed by the surviving corporation.
2000 Stock Incentive Compensation Plan
Our 2000 stock incentive compensation plan will offer opportunities to our
employees, directors, officers, consultants, agents, advisors and independent
contractors to participate in our growth and success, to encourage them to
remain in our service and to own our stock. The 2000 stock incentive
compensation plan permits both option and stock grants. We have reserved the
following shares of common stock for the 2000 stock incentive compensation plan:
- shares; plus
- any shares returned to the 1998 stock option plan upon termination of
options other than terminations due to exercise or settlement of such
options; plus
- an automatic annual increase, to be added on the first day of our fiscal
year beginning April 1, 2002, equal to the lesser of
shares or % of the average common shares outstanding
as used to calculate fully diluted earnings per share as reported to our
shareholders in our annual report for the preceding year.
The plan administrator will make proportional adjustments to the aggregate
number of shares issuable under the 2000 stock incentive compensation plan and
to outstanding awards in the event of stock splits or other capital adjustments.
STOCK OPTION GRANTS. The compensation committee will serve as the plan
administrator of the 2000 stock incentive compensation plan. The plan
administrator will select individuals to receive options and specify the terms
and conditions of each option granted, including:
- the exercise price;
- the vesting provisions; and
- the option term.
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<PAGE> 47
The exercise price must not be less than the fair market value of the
common stock on the date of the grant for incentive stock options and not less
than 85% of the fair market value of the common stock on the date of the grant
for nonstatutory stock options.
Unless otherwise provided by the plan administrator, options granted under
the 2000 stock incentive compensation plan will vest over a -year
period, and generally will expire on the earliest of:
- ten years from the date of grant;
- one year after the optionee's retirement, death or disability;
- notice to the optionee of termination of employment or service for cause;
and
- three months after other terminations of employment or service.
Stock Awards. The plan administrator is authorized under the 2000 stock
incentive compensation plan to issue shares of common stock to eligible
participants with terms, conditions, and restrictions established by the plan
administrator in its sole discretion. Restrictions may be based on continuous
service or the achievement of performance goals. Holders of restricted stock
will be shareholders of 800.COM and will have, subject to established
restrictions, all the rights of shareholders with respect to such shares.
Corporate Transactions. In the event of a corporate transaction, such as a
merger or sale of 800.COM, each outstanding option to purchase shares under the
2000 stock incentive compensation plan may be assumed or an equivalent option
substituted by the successor corporation. If the successor corporation does not
assume or provide an equivalent substitute for the option, the option will fully
vest and the holder will have the right to exercise the option immediately
before the corporate transaction. Some option agreements may call for
accelerated vesting in the event of a corporate transaction. In addition, the
plan administrator has discretion to accelerate the vesting of all options in
the event of a corporate transaction.
Termination of the Plan. Unless terminated sooner by the board of
directors, the 2000 stock incentive compensation plan will terminate ten years
from the date of its approval by the board of directors.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
Our articles of incorporation eliminate, to the fullest extent permitted by
Oregon law, liability of a director to us or our shareholders for monetary
damages resulting from conduct as a director. Although liability for monetary
damages has been eliminated to this extent, equitable remedies such as
injunctive relief or rescission remain available. In addition, a director is not
relieved of his responsibilities under any other law, including the federal
securities laws.
Our articles of incorporation and bylaws provide that we shall indemnify
our directors and may indemnify our officers, employees and other agents to the
fullest extent permitted by law. We also carry an insurance policy for the
protection of our officers and directors against any liability asserted against
them in their official capacities. We believe these provisions for the
limitation of liability enhance our ability to attract and retain qualified
persons as directors and officers.
To the extent that indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to our directors, officers and
controlling persons under the above provisions, we have been advised that in the
opinion of the Securities and Exchange Commission this indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
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<PAGE> 48
RELATED PARTY TRANSACTIONS
In June 1998, we issued warrants to purchase common stock at an exercise
price of $0.10 per share to individuals who guaranteed portions of a $500,000
bank loan made to us. Gregory L. Drew, our Chairman of the Board, Chief
Executive Officer and President, was one of these individuals. In connection
with his guarantee, we granted Mr. Drew a warrant to purchase 150,000 shares,
which he exercised in March 2000.
In October and November 1998, we sold shares of Series A preferred stock to
investors at a purchase price of $1.00 per share, including, among others, the
following:
<TABLE>
<CAPTION>
NUMBER
PURCHASER OF SHARES
--------- ---------
<S> <C>
Olympic Venture Partners.......................... 2,140,000
CB (Berkman) Capital.............................. 500,000
</TABLE>
Olympic Venture Partners also received warrants to purchase 458,571 shares
of common stock, with an aggregate exercise price of $1.00, in connection with
its provision of temporary financing prior to the closing of the Series A
preferred stock investment. Gerard H. Langeler, one of our directors, is a
General Partner of Olympic Venture Partners, which holds more than 5% of our
stock. CB (Berkman) Capital holds more than 5% of our stock.
In March 1999, we sold shares of Series B preferred stock to investors at a
purchase price of $2.21 per share, including, among others, the following:
<TABLE>
<CAPTION>
NUMBER
PURCHASER OF SHARES
--------- ---------
<S> <C>
Trinity Ventures.................................. 1,809,955
APV Technology Partners........................... 1,764,706
CB (Berkman) Capital.............................. 1,357,466
Vulcan Ventures Inc............................... 1,131,222
Olympic Venture Partners.......................... 968,326
</TABLE>
Olympic Venture Partners and CB (Berkman) Capital also received warrants to
purchase 107,000 shares of common stock and 150,000 shares of common stock,
respectively, with an exercise price of $0.10 per share, in connection with
their provision of temporary financing prior to the closing of the Series B
preferred stock investment. James G. Shennan, Jr., one of our directors, is a
General Partner of Trinity Ventures, which holds more than 5% of our stock.
Peter G. Bodine and Spencer C. Tall, two of our directors, are General Partners
of APV Technology Partners, which holds more than 5% of our stock. Vulcan
Ventures Inc. holds more than 5% of our stock.
In March 1999, we entered into a Consultant and Representative Agreement
with Asia Pacific Ventures Company. The agreement provided that Asia Pacific
Ventures would assist us in the development of strategic partnerships with
suppliers in exchange for our issuance to Asia Pacific Ventures of warrants to
purchase up to 440,000 shares of common stock. We issued an immediately
exercisable warrant to purchase 220,000 shares of common stock, with an exercise
price of $0.23 per share, when we signed the agreement. We issued a second
warrant exercisable for up to 220,000 shares that would vest upon the
satisfaction of performance milestones by Asia Pacific Ventures. In February
2000, Asia Pacific Ventures reached these milestones, the second warrant fully
vested and the exercise price was set at $ per share. Asia Pacific Ventures
is an affiliate of APV Technology Partners and Messrs. Bodine and Tall serve as
its managing members.
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<PAGE> 49
In October and November 1999, we sold shares of Series C preferred stock to
investors at a purchase price of $6.61 per share, including, among others, the
following:
<TABLE>
<CAPTION>
NUMBER
PURCHASER OF SHARES
--------- ---------
<S> <C>
Levrick Limited................................... 1,512,859
Vulcan Ventures Inc. ............................. 1,134,644
CB (Berkman) Capital.............................. 926,981
Olympic Venture Partners.......................... 615,732
Trinity Ventures.................................. 453,858
APV Technology Partners........................... 242,058
Timothy Zuckert................................... 50,378
</TABLE>
Vulcan Ventures Inc. also received warrants to purchase 170,197 shares of
common stock, with an exercise price of $6.61 per share, in connection with its
provision of temporary financing prior to the closing of the Series C preferred
stock investment. Levrick Limited holds more than 5% of our stock. Timothy
Zuckert is one of our executive officers.
In March 2000, we agreed to sell shares of Series D preferred stock to
investors at a purchase price of $7.50 per share, including, among others, the
following:
<TABLE>
<CAPTION>
NUMBER
PURCHASER OF SHARES
--------- ---------
<S> <C>
Vulcan Venturers Inc.............................. 533,333
CB (Berkman) Capital.............................. 133,333
Olympic Venture Partners.......................... 133,333
Trinity Ventures.................................. 133,333
APV Technology Partners........................... 72,666
</TABLE>
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<PAGE> 50
PRINCIPAL SHAREHOLDERS
The following table contains information about the beneficial ownership of
our common stock as of February 29, 2000, for
- each person who beneficially owns more than 5% of our common stock;
- each director;
- each executive officer named in the summary compensation table; and
- all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote and except for
community property laws where applicable, the persons named in the following
table have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. The percentage of beneficial
ownership before the offering is based on 24,356,908 shares of common stock
outstanding as of February 29, 2000, as adjusted to reflect the conversion of
all outstanding shares of preferred stock into common stock upon the closing of
this offering. The percentage of beneficial ownership after the offering
additionally reflects the shares offered by this prospectus.
The table assumes no exercise of the underwriters' over-allotment option.
If the underwriters' over-allotment option is exercised in full, we will sell up
to a total of additional shares of our common stock, and up to
shares of common stock will be outstanding after the completion of
this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES OUTSTANDING
NUMBER OF SHARES ---------------------------------
NAME AND ADDRESS BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
---------------- ------------------ --------------- --------------
<S> <C> <C> <C>
Olympic Venture Partners(1)...................... 4,289,629 17.2% %
2420 Carillion Point
Kirkland, Washington 98033
Gerard H. Langeler(1)............................ 4,289,629 17.2
c/o Olympic Venture Partners
340 Oswego Pointe Drive, Suite 200
Lake Oswego, Oregon 97034
CB (Berkman) Capital(2).......................... 2,934,447 12.0
806 SW Broadway, Suite 900
Portland, Oregon 97205
Gregory L. Drew(3)............................... 2,737,500 11.2
c/o 800.COM, Inc.
1516 N.W. Thurman
Portland, Oregon 97209
APV Technology Partners(4)....................... 480,700 10.0
535 Middlefield Road, Suite 150
Menlo Park, CA 94025
Peter G. Bodine(4)............................... 480,700 10.0
c/o APV Technology Partners
535 Middlefield Road, Suite 150
Menlo Park, CA 94025
Spencer C. Tall(4)............................... 480,770 10.0
c/o APV Technology Partners
535 Middlefield Road, Suite 150
Menlo Park, CA 94025
</TABLE>
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<PAGE> 51
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES OUTSTANDING
NUMBER OF SHARES ---------------------------------
NAME AND ADDRESS BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
---------------- ------------------ --------------- --------------
<S> <C> <C> <C>
Vulcan Ventures, Inc.(5)......................... 2,436,063 9.9
110 110th Avenue, N.E. #550
Bellevue, Washington 98004
Trinity Ventures(6).............................. 2,263,813 9.3
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, California 94025
James G. Shennan, Jr.(6)......................... 2,263,813 9.3
c/o Trinity Ventures
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, California 94025
Levrick Limited.................................. 1,512,859 6.2 --
c/o Royal Bank of Canada Trust
Company (Jersey) Limited
P.O. Box 194
19 - 21 Broad Street
St. Helier, Jersey JE4 8RR
Channel Islands
Len K. Jordan(7)................................. 34,780 * *
2643 W. Viewmont Way W
Seattle, Washington 98199
All directors and executive officers as a group
(9 persons)(8)................................. 11,890,650 46.5
</TABLE>
- -------------------------
* Represents beneficial ownership of less than 1%.
(1) Consists of 3,056,263 shares and immediately exercisable warrants to
purchase 528,571 shares held by Olympic Venture Partners IV, L.P.; 453,857
shares held by Olympic Venture Partners V, L.P.; and 213,938 shares and
immediately exercisable warrants to purchase 37,000 shares held by OVP IV
Entrepreneurs Fund. Mr. Langeler is a General Partner of Olympic Venture
Partners, which controls the foregoing funds. Mr. Langeler has shared voting
and investment power over the all of these shares, and he disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest in such shares.
(2) Consists of 1,178,733 shares and immediately exercisable warrants to
purchase 150,000 shares held by CB (Berkman) Capital; 756,430 shares held by
CB (Berkman) Capital II; and 849,284 shares held by CB (Berkman) Capital
IIA.
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<PAGE> 52
(3) Includes 1,293,750 shares held by McDonald Investments Inc. FBO Gregory L.
Drew IRA dated June 7, 1998, c/o McDonald Investment Center, 800 Superior
Avenue, Cleveland, Ohio 44114; and immediately exercisable warrants to
purchase 150,000 shares.
(4) Consists of 1,946,386 shares and immediately exercisable warrants to
purchase 139,339 shares held by APV Technology Partners II, L.P.; 48,302
shares and immediately exercisable warrants to purchase 2,932 shares held by
APV Technology Partners, L.P.; and 12,076 shares and immediately exercisable
warrants to purchase 729 shares held by APV Technology Partners U.S., L.P.
Messrs. Bodine and Tall are General Partners of APV Technology Partners,
which controls the foregoing funds. Also includes immediately exercisable
warrants to purchase 297,000 shares held by Asia Pacific Ventures, an
affiliate of APV Technology Partners; and 33,936 shares held by WPS, LLC.
Messrs. Bodine and Tall are managing members of both Asia Pacific Ventures
and WPS, LLC. Messrs. Bodine and Tall may be deemed to be the beneficial
owner of the 297,000 shares held by Asia Pacific Ventures and WPS, LLC,
which have sole power to vote and dispose of their respective shares.
Messrs. Bodine and Tall have shared voting and investment power over the all
of the shares described in this footnote. Messrs. Bodine and Tall disclaim
beneficial ownership of all of the foregoing shares except to the extent of
their respective pecuniary interests in such shares.
(5) Includes immediately exercisable warrants to purchase 170,197 shares.
(6) Consists of 2,141,219 shares held by Trinity Ventures VI, L.P.; and 122,594
shares held by Trinity VI Side-by-Side Fund, L.P. Mr. Shennan is a General
Partner of Trinity Ventures, which controls the foregoing funds. Mr. Shennan
has shared voting and investment power over the all of these shares, and he
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest in such shares.
(7) Consists of 34,780 shares subject to options exercisable within 60 days of
February 29, 2000.
(8) Includes immediately exercisable warrants to purchase 1,155,571 shares and
34,780 shares subject to options exercisable within 60 days of February 29,
2000.
49
<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
At December 31, 1999, assuming conversion of all shares of preferred stock
into common stock, 24,221,671 shares of our common stock would have been
outstanding and held by 78 shareholders of record. Upon completion of this
offering, our authorized capital stock will consist of million shares of
common stock and million shares of preferred stock.
The following description of our capital stock gives effect to the
amendment to our articles of incorporation to be filed upon completion of this
offering. Our articles of incorporation and bylaws, as amended and restated upon
the completion of this offering, provide further information about our capital
stock.
COMMON STOCK
Following this offering, shares of common stock will be issued and
outstanding. This number does not reflect the exercise of stock options or
warrants after December 31, 1999. Holders of common stock are entitled to one
vote per share on all matters to be voted on by the shareholders. Because
holders of common stock do not have cumulative voting rights, the holders of a
majority of the shares of common stock can elect all of the members of our board
of directors standing for election. Subject to the preferences of any preferred
stock that may be issued in the future, the holders of common stock are entitled
to receive any dividends that may be declared by our board of directors. If we
are liquidated, dissolved or wound up, the holders of common stock are entitled
to receive pro rata all of the assets available for distribution after payment
of liquidation preferences of any outstanding shares of preferred stock. There
are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and non-assessable.
PREFERRED STOCK
Following this offering, there will be no shares of preferred stock issued
and outstanding. Our board of directors has the authority, without further
action by our shareholders, to issue up to million shares of
preferred stock in one or more series and to fix the privileges and rights of
each series. These privileges and rights may be greater than those of the common
stock. Our board of directors, without further shareholder approval, can issue
preferred stock with voting, conversion or other rights that could adversely
affect the voting power and other rights of the holders of common stock. This
type of "blank check preferred stock" makes it possible for us to issue
preferred stock quickly with terms calculated to delay or prevent a change in
control of us or make removal of our management more difficult. Additionally, if
we issue this blank check preferred stock, the market price of our common stock
may decrease, and its voting and other rights may be diminished. We have no
current plans to issue any preferred stock.
REGISTRATION RIGHTS
After this offering, the holders of 20,183,425 shares of common stock will
have rights with respect to the registration of these shares under the
Securities Act. Under the terms of the investors' rights agreement between us
and the holders of these registrable securities, if after this offering we
propose to register any securities under the Securities Act for our own account,
these holders are entitled to notice of registration and to include their shares
of common stock in the registration. The holders of these registrable securities
are also entitled to demand registration rights under which, upon the request of
the holders of a majority of these registrable securities, they may require us
to file a registration statement under the Securities Act at our expense with
respect to shares of our common stock, and we are required to use our best
efforts to cause this registration to become effective. Further, the holders of
these registrable securities may require us to file additional registration
statements on Form S-3. All of these
50
<PAGE> 54
registration rights are subject to conditions and limitations, including the
right of the underwriters of an offering to limit the number of shares included
in the registration.
ANTI-TAKEOVER MEASURES
ARTICLES OF INCORPORATION AND BYLAWS
Our articles of incorporation and bylaws contain provisions that may have
the effect of delaying, deferring or preventing a change in control. These
provisions include:
- allowing the board of directors, without further shareholder approval, to
issue up to shares of preferred stock;
- requiring a classified board whenever there are six or more directors,
with each class containing, as nearly as possible, one-third of the total
number of directors and the members of each class serving for staggered
three-year terms;
- prohibiting cumulative voting for the election of directors;
- requiring supermajority approval of the shareholders to effect amendments
to the bylaws; and
- requiring no less than 60 days' advance notice with respect to
nominations of directors or other matters to be voted on by shareholders
other than by or at the direction of the board of directors.
OREGON CONTROL SHARE AND BUSINESS COMBINATION STATUTES
Oregon law may restrict the ability of our significant shareholders to
exercise voting rights. The law generally applies to a person who acquires
voting stock of an Oregon corporation in a transaction that results in that
person holding more than 20%, 33 1/3% or 50% of the total voting power of the
corporation. If such a transaction occurs, the person cannot vote the shares
unless voting rights are restored to those shares by:
- the holders of a majority of the outstanding voting shares, including the
acquired shares; and
- the holders of a majority of the outstanding voting shares, excluding the
acquired shares and shares held by the corporation's officers and inside
directors.
This law is construed broadly and may apply to persons acting as a group.
The restricted shareholder may, but is not required to, submit to the
corporation a statement setting forth information about itself and its plans
with respect to the corporation. The statement may request that the corporation
call a special meeting of shareholders to determine whether voting rights will
be granted to the shares acquired. If a special meeting of shareholders is not
requested, the issue of voting rights of the acquired shares will be considered
at the next annual or special meeting of shareholders. If the acquired shares
are granted voting rights and they represent a majority of all voting power,
shareholders who do not vote in favor of granting voting rights will have the
right to receive the appraised fair value of their shares. The appraised fair
value will, at a minimum, be equal to the highest price paid per share by the
person for the shares acquired in a transaction subject to this law.
We are also subject to provisions of Oregon law that govern business
combinations between corporations and interested shareholders. These provisions
generally prohibit a corporation from entering into a business combination
transaction with a person, or affiliate of that person, for a period of three
years
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<PAGE> 55
from the date the person acquires 15% or more of the voting stock of the
corporation. For the purpose of this law, the prohibition generally applies to
the following:
- a merger or plan of share exchange;
- any sale, lease, mortgage, or other disposition of 10% or more of the
assets of the corporation; and
- transactions that result in the issuance of capital stock of the
corporation to the 15% shareholder.
The general prohibition does not apply, however, if:
- the 15% shareholder, as a result of the transaction in which the person
acquired 15% of the shares, owns at least 85% of the outstanding voting
stock of the corporation;
- the board of directors approves the share acquisition or business
combination before the shareholder acquires 15% or more of the
corporation's outstanding voting stock; or
- the board of directors and the holders of at least two-thirds of the
outstanding voting stock of the corporation, excluding shares owned by
the 15% shareholder, approve the transaction after the shareholder
acquires 15% or more of the corporation's voting stock.
OREGON CONSTITUENCY STATUTE
Oregon law provides that our board of directors may consider other
interests other than those of the majority of independent shareholders in
determining whether a proposed acquisition is in our best interests, including
the following:
- the social, legal and economic effects of the proposed transaction on our
employees, customers and suppliers and on the communities and
geographical areas in which we operate;
- the economy of the state or the nation;
- our long-term and short-term interests and those of our shareholders,
including the possibility that these interests may be best served by the
continued independence of the corporation; and
- other relevant factors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is
, [location].
LISTING
We have applied to list our common stock on the Nasdaq National Market
under the trading symbol "EHDC."
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<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
As a result of various contractual and securities law restrictions on
resale, only 15,737 shares outstanding immediately before this offering will be
available for sale immediately after this offering. Sales of substantial amounts
of our common stock in the public market after the restrictions lapse could
adversely affect the prevailing market price and our ability to raise equity
capital in the future.
Upon completion of this offering, we will have shares of
common stock outstanding, assuming no exercise of the underwriter's
over-allotment option and no exercise of outstanding options or warrants. Of
these shares, the shares offered for sale through the
underwriters will be freely tradable without restriction under the Securities
Act unless purchased by our affiliates or covered by a separate lockup agreement
with the underwriters.
The remaining shares of common stock will be restricted
securities. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration described below
under Rules 144, 144(k) or 701 promulgated under the Securities Act.
As a result of the lockup agreements and the provisions of Rules 144,
144(k) and 701, these restricted shares will be available for sale in the public
market as follows:
- 15,737 shares may be sold immediately after the offering;
- the remaining restricted shares may not be sold before 180
days from the date of this prospectus without the prior written consent
of FleetBoston Robertson Stephens Inc.;
- of the remaining restricted shares, shares may be sold under
Rule 144 or Rule 701 beginning 181 days after the date of this
prospectus, as they have been held for the required period of time; and
- the remaining restricted shares may be sold under Rule 144 or 144(k) once
they have been held for the required period of time.
Lockup Agreements. Substantially all of our shareholders and holders of
options exercisable within 180 days of the date of this prospectus have agreed
not to transfer or dispose of, directly or indirectly, any shares of our common
stock or any securities exercisable for shares of our common stock, for a period
of 180 days after the date of this prospectus. Transfers or dispositions can be
made sooner only with the prior written consent of FleetBoston Robertson
Stephens Inc., which has no present intent to release affiliates from the lockup
agreements.
Rule 144. In general, under Rule 144, a person who has beneficially owned
restricted securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately shares immediately after this
offering; or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144 discussed above.
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<PAGE> 57
Rule 701. In general, under Rule 701, any of our employees, officers,
directors, consultants or advisors who purchased or received shares from us
before this offering under a compensatory stock purchase plan or option plan or
other written agreement will be eligible to resell their shares beginning 90
days after the date of this prospectus. Such shares, however, could still be
subject to a lockup agreement for a period of 180 days after the date of this
prospectus. Non-affiliates will be able to sell their shares subject only to the
manner of sale provisions of Rule 144. Affiliates will be able to sell their
shares subject to the requirements of Rule 144, other than the holding period
requirements.
Registration Rights. Upon completion of this offering, the holders of
20,183,425 shares of our common stock will be entitled to rights with respect to
the registration of their shares under the Securities Act. See "Description of
Capital Stock -- Registration Rights." Except for shares purchased by
affiliates, registration of their shares under the Securities Act would result
in these shares becoming freely tradable without restriction under the
Securities Act immediately upon the effectiveness of the registration statement.
Stock Options. Immediately after this offering, we intend to file a
registration statement on Form S-8 under the Securities Act covering the shares
of common stock reserved for issuance upon exercise of outstanding options. The
Form S-8 registration statement is expected to be filed and become effective as
soon as practicable after the closing of this offering. Accordingly, shares
registered under the Form S-8 registration statement will be available for sale
in the open market beginning 181 days after the date of this prospectus, or
earlier if released from the lockup agreements by Fleet Boston Robertson
Stephens Inc., subject to the Rule 144 volume limitations applicable to our
affiliates.
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<PAGE> 58
UNDERWRITING
We are offering the shares of common stock described in this prospectus
through a number of underwriters. FleetBoston Robertson Stephens Inc., Dain
Rauscher Incorporated and Prudential Securities Incorporated are the
representatives of the underwriters. We have entered into an underwriting
agreement with these representatives. Subject to the terms and conditions of the
underwriting agreement, we have agreed to sell to the underwriters, and each
underwriter has separately agreed to purchase from us, the number of shares of
common stock listed next to its name below at the public offering price, less
the underwriting discount described on the cover page of this prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
FleetBoston Robertson Stephens Inc..........................
Dain Rauscher Incorporated..................................
Prudential Securities Incorporated..........................
--------
Total.....................................................
========
</TABLE>
The underwriting agreement provides that the underwriters must buy all of
these shares from us if they buy any of them. The underwriters will sell these
shares to the public when and if the underwriters buy them from us. The
underwriters are offering the common stock subject to a number of conditions,
including:
- the underwriters' receipt and acceptance of the common stock from us; and
- the underwriters' right to reject orders in whole or in part.
Fleet Boston Robertson Stephens Inc. expects to deliver the shares of
common stock to purchasers on , 2000.
Over-Allotment Option. We have granted the underwriters an option to buy up
to additional shares of our common stock at the same price per share
as they are paying for the shares shown in the table above. The underwriters may
exercise this option only to the extent that they sell more than the total
number of shares shown in the table above. The underwriters may exercise this
option at any time within 30 days after the date of this prospectus. To the
extent that the underwriters exercise this option, the underwriters will be
obligated to purchase the additional shares from us in the same proportions as
they purchased the shares shown in the table above. If purchased, these
additional shares will be sold by the underwriters on the same terms as those on
which the other shares are being sold.
Stock Market Listing. We have applied to list our common stock on the
Nasdaq National Market under the trading symbol "EHDC."
Determination of Offering Price. Before this offering, there has been no
public market for our common stock. The initial public offering price will be
determined through negotiations between us and the representatives. In addition
to prevailing market conditions, the factors to be considered in determining the
initial public offering price will include:
- the valuation of publicly-traded companies that the representatives
believe are comparable to us;
- our financial information;
- our history and prospects and the outlook for our industry;
- an assessment of our management, our past and present operations, and the
prospects for, and timing of, our future revenue;
- the present state of our development and the progress of our business
plan; and
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<PAGE> 59
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the our shares may not develop. Even if an
active market does develop, the public price at which our shares trade in the
future may be below the offering price.
Underwriting Discounts and Commissions. The underwriting discount is the
difference between the price the underwriters pay to us and the price at which
the underwriters initially offer the shares to the public. The following table
shows the per share and total underwriting discounts to be paid to the
underwriters. These amounts are shown assuming no exercise and full exercise of
the underwriters' over-allotment option described above:
<TABLE>
<CAPTION>
PER SHARE NO EXERCISE FULL EXERCISE
--------- ----------- -------------
<S> <C> <C> <C>
Public offering price.................... $ $ $
Underwriting discount....................
Proceeds, before expenses, to us......... $ $ $
</TABLE>
The expenses of this offering, not including the underwriting discount, are
estimated to be approximately $ and will be paid by us. Expenses
include the SEC filing fee, the NASD filing fee, Nasdaq listing fees, printing
expenses, legal and accounting fees, transfer agent and registrar fees and other
miscellaneous fees and expenses.
Lockup Agreements. We and our executive officers, directors and
substantially all of our shareholders, have agreed, with exceptions, not to sell
or transfer any shares of our common stock for 180 days after the date of this
prospectus without first obtaining the written consent of FleetBoston Robertson
Stephens Inc. Specifically, we and these other individuals have agreed not to,
directly or indirectly:
- offer to sell, contract to sell, or otherwise sell or dispose of any
shares of our common stock;
- loan, pledge or grant any rights with respect to any shares of our common
stock;
- engage in any hedging or other transaction that might result in a
disposition of shares of our common stock by anyone;
- execute any short sale, whether or not against the box; or
- purchase, sell or grant any put or call option or other right with
respect to our common stock or with respect to any security other than a
broad-based market basket or index that includes, relates to or derives
any significant part of its value from our common stock.
These lockup agreements apply to shares of our common stock and also to any
options or warrants to purchase any shares of common stock or any securities
convertible into or exchangeable for shares of common stock. These lockup
agreements apply to all such securities that are owned or later acquired by the
persons executing the agreements. In addition, we have agreed with FleetBoston
Robertson Stephens Inc. that, to the extent that we have separate lockup
agreements with some of our shareholders, we will not consent to such
shareholders' disposition of any shares subject to the separate lock up
agreements prior to the expiration of the lockup period. However, FleetBoston
Robertson Stephens Inc. may release any of us from these agreements at any time
during the 180-day period, in its sole discretion and without notice, as to some
or all of the shares covered by these agreements. Currently, there are no
agreements between the representatives and us or any of our shareholders to
release any of us from the lockup agreements during such 180-day period.
Indemnification of the Underwriters. We will indemnify the underwriters
against some civil liabilities, including liabilities under the Securities Act
and liabilities arising from breaches of our representations and warranties
contained in the underwriting agreement. If we are unable to provide this
indemnification, we will contribute to payments the underwriters may be required
to make in respect of those liabilities.
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<PAGE> 60
Dealers' Compensation. The underwriters initially will offer our shares to
the public at the price specified on the cover page of this prospectus. The
underwriters may allow to selected dealers a concession of not more than
$ per share. The underwriters may also allow, and any other dealers may
reallow, a concession of not more than $ per share to some other dealers. If
all the shares are not sold at the initial public offering price, the
underwriters may change the initial public offering price and the other selling
terms. A change in the initial public offering price will not affect the amount
of proceeds we receive.
Discretionary Accounts. The underwriters do not expect to sell more than an
aggregate of 5% of the shares offered by this prospectus in the aggregate to
accounts over which they exercise discretionary authority.
Directed Share Program. At our request, the underwriters have reserved for
sale, at the initial public offering price, up to shares, or 5% of the
shares offered by this prospectus for sale to some of our directors, officers
and employees and their family members, and other persons with relationships
with us. The number of shares available for sale to the general public will be
reduced to the extent those persons purchase the reserved shares. Any reserved
shares which are not orally confirmed for purchase within one day of the pricing
of this offering may be offered by the underwriters to the general public on the
same terms as the other shares offered by this prospectus.
Online Activities. A prospectus in electronic format may be made available
on the Internet sites or through other online services maintained by one or more
of the underwriters of this offering, or by their affiliates. In those cases,
prospective investors may view offering terms online and, depending upon the
underwriter, may be allowed to place orders online. The underwriters may agree
with us to allocate a specific number of shares for sale to online brokerage
account holders. Any such allocation for online distributions will be made by
the representatives on the same basis as other allocations.
In particular, Prudential Securities Incorporated facilitates the marketing
of new issues online through its PrudentialSecurities.com division. Clients of
Prudential Advisor(SM), a full service brokerage firm program, may view offering
terms and a prospectus online and place orders through their financial advisors.
Stabilization and Other Transactions. The rules of the Securities and
Exchange Commission generally prohibit the underwriters from trading in our
common stock on the open market during this offering. However, the underwriters
are allowed to engage in some open market transactions and other activities
during this offering that may cause the market price of our common stock to be
above or below that which would otherwise prevail in the open market. These
activities may include stabilization, short sales and over-allotments, syndicate
covering transactions and penalty bids, which are described below.
- Stabilizing transactions consist of bids or purchases made by the lead
representative for the purpose of preventing or slowing a decline in the
market price of our common stock while this offering is in progress.
- Short sales and over-allotments occur when the representatives, on behalf
of the underwriting syndicate, sell more of our shares than they purchase
from us in this offering. In order to cover the resulting short position,
the representatives may exercise the over-allotment option described
above and/or they may engage in syndicate covering transactions.
- Syndicate covering transactions are bids for or purchases of our common
stock on the open market by the representatives on behalf of the
underwriters in order to reduce a short position incurred by the
representatives on behalf of the underwriters.
- A penalty bid is an arrangement permitting the representatives to reclaim
the selling concession that would otherwise accrue to an underwriter if
the common stock originally sold by that underwriter is repurchased by
the representatives and therefore was not effectively sold to the public
by such underwriter.
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<PAGE> 61
If the underwriters commence these activities, they may discontinue them at any
time without notice. The underwriters may carry out these transactions on the
Nasdaq National Market, in the over-the-counter market or otherwise.
Passive Market Making. Following the pricing of this offering, and until
the commencement of any stabilizing bid, underwriters and dealers who are
qualified market makers on the Nasdaq National Market may engage in passive
market making transactions. Passive market making is allowed during the period
when the Commission's rules would otherwise prohibit market activity by the
underwriters and dealers who are participating in this offering. Passive market
makers must comply with applicable volume and price limitations and must be
identified as such. In general, a passive market maker must display its bid at a
price not in excess of the highest independent bid for our common stock; but if
all independent bids are lowered below the passive market maker's bid, the
passive market maker must also lower its bid once it exceeds specified purchase
limits. Net purchases by a passive market maker on each day are limited to a
specified percentage of the passive market maker's average daily trading volume
in our common stock during a specified period and must be discontinued when such
limit is reached. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.
Some of the underwriters may in the future perform financial advisory
services for us.
LEGAL MATTERS
The validity of the common stock offered hereby and other legal matters
will be passed upon for 800.COM by Perkins Coie LLP, Portland, Oregon. Legal
matters will be passed upon for the underwriters by O'Melveny & Myers LLP, San
Francisco, California. As of the date of this prospectus, TWB Investment
Partnership, a partnership comprised of current and former partners of Perkins
Coie LLP, beneficially owned an aggregate of 100,000 shares of our common stock.
EXPERTS
The financial statements as of March 31, 1998, and 1999, and for the period
ended March 31, 1999, included in this prospectus, have been so included in
reliance upon the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission. This prospectus, which is a part of the registration
statement, does not contain all of the information included in the registration
statement. Some information is omitted and you should refer to the registration
statement and its exhibits. With respect to references made in this prospectus
to any contract, agreement or other document of 800.COM, these references are
not necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract, agreement or other
document. You may review a copy of the registration statement, including
exhibits, at the Commission's public reference room at Judiciary Plaza, 450
Fifth Street, Washington, D.C. 20549, or Seven World Trade Center, Suite 13th
floor, New York, New York 10048, or Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Please call the Commission at
1-800-SEC-0330 for further information on the operation of the public reference
rooms.
Statements contained in this prospectus concerning the provisions of
documents are necessarily summaries of the material provisions of such
documents, and each statement is qualified by reference to the copy of the
applicable document filed with the Commission.
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<PAGE> 62
We will also file annual, quarterly and current reports, proxy statements
and other information with the Commission. You may read and copy any reports,
statements or other information on file at the public reference rooms. You can
also request copies of these documents, for a copying fee, by writing to the
Commission.
Our filings and the registration statement can also be reviewed by
accessing the Commission's Internet site at http://www.sec.gov, which contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
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<PAGE> 63
800.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statement of Operations..................................... F-4
Statement of Shareholders' Equity (Deficit)................. F-5
Statement of Cash Flows..................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 64
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF 800.COM, INC.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of 800.COM, Inc. at
March 31, 1999, and 1998, and the results of its operations and its cash flows
for the year ended March 31, 1999 in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Portland, Oregon
March 15, 2000, except as to Note 13, which is as of March 22, 2000
F-2
<PAGE> 65
800.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
MARCH 31, EQUITY AT
----------------------- DECEMBER 31, DECEMBER 31,
1998 1999 1999 1999
------- ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 1,000 $ 7,872,350 $ 15,584,715
Restricted cash (note 2)............................ -- 130,000 9,300,000
Receivables (note 3)................................ -- 29,032 503,866
Inventory........................................... -- 1,027,822 9,574,828
Prepaid expenses and other current assets........... -- 74,591 1,618,796
------- ------------ ------------
Total current assets.............................. 1,000 9,133,795 36,582,205
------- ------------ ------------
Property and equipment, net (notes 4, 6 and 7)........ -- 1,744,069 5,509,455
Other assets.......................................... -- 282,664 268,052
------- ------------ ------------
Total assets...................................... $ 1,000 $ 11,160,528 $ 42,359,712
======= ============ ============
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................... $ -- $ 910,525 $ 6,732,158
Accrued liabilities................................. -- 144,529 1,266,666
Note payable to bank (note 5)....................... -- 500,000 --
Current portion of capital lease obligations (note
6)................................................ -- 115,236 101,951
Current portion of long-term debt (note 7).......... -- 4,545 4,925
------- ------------ ------------
Total current liabilities......................... -- 1,674,835 8,105,700
Capital lease obligations, less current portion (note
6).................................................. -- 72,157 --
Long-term debt, less current portion (note 7)......... -- 21,520 17,777
------- ------------ ------------
Total liabilities................................. -- 1,768,512 8,123,477
------- ------------ ------------
Mandatorily redeemable convertible preferred stock
(note 8):
Series C redeemable preferred stock; $.01 par value,
9,277,156 shares authorized, and no shares, no
shares, 8,720,983, and no shares issued and
outstanding at March 31, 1998, March 31, 1999,
December 31, 1999 and pro forma December 31, 1999,
respectively; liquidation preference of
$57,645,698....................................... -- -- 57,592,587 $ --
Series B redeemable preferred stock; $.01 par value,
7,500,000 shares authorized and no shares,
7,262,442, 7,262,442, and no shares issued and
outstanding at March 31, 1998, March 31, 1999,
December 31, 1999 and pro forma December 31, 1999,
respectively; liquidation preference of
$16,049,997....................................... -- 15,994,815 16,000,106 --
Series A preferred stock; $.01 par value, 4,000,000
shares authorized, and no shares 4,000,000,
4,000,000, and no shares issued and outstanding at
March 31, 1998, March 31, 1999, December 31, 1999
and pro forma December 31, 1999, respectively;
liquidation preference of $4,000,000.............. -- 3,939,762 3,939,762 --
------- ------------ ------------ ------------
-- 19,934,577 77,532,455 --
------- ------------ ------------ ------------
Commitments and contingencies (notes 6 and 12)
Shareholders' equity (deficit) (note 9):
Common stock, $.01 par value, 3,000,000, 40,000,000
and 50,000,000 shares authorized; 900,000,
3,951,250, 4,238,246 and 25,763,439 shares issued
and outstanding at March 31, 1998, March 31, 1999,
December 31, 1999 and pro forma December 31, 1999,
respectively...................................... 9,000 39,513 42,382 257,634
Additional paid-in capital.......................... (8,000) 1,840,960 5,750,439 84,361,819
Unearned compensation............................... -- (363,042) (1,314,478) (1,314,478)
Shareholders' receivable............................ -- (12,500) -- --
Accumulated deficit................................. -- (12,047,492) (47,774,563) (47,774,563)
------- ------------ ------------ ------------
Total shareholders' equity (deficit).............. 1,000 (10,542,561) (43,296,220) $ 35,530,412
------- ------------ ------------ ============
Total liabilities, mandatorily redeemable
convertible preferred stock and shareholders'
equity.......................................... $ 1,000 $ 11,160,528 $ 42,359,712
======= ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 66
800.COM, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31,
MARCH 31, ---------------------------
1999 1998 1999
------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales......................................... $ 3,024,262 $ 1,336,436 $ 23,698,077
Cost of goods sold................................ 3,149,811 1,316,907 23,730,805
------------ ----------- ------------
Gross profit...................................... (125,549) 19,529 (32,728)
------------ ----------- ------------
Operating expenses:
Sales and marketing............................. 8,941,094 3,970,062 30,199,078
Information systems............................. 1,161,034 572,535 2,572,123
General and administrative...................... 1,245,435 321,759 2,364,224
------------ ----------- ------------
Total operating expenses.......................... 11,347,563 4,864,356 35,135,425
------------ ----------- ------------
Loss from operations.............................. (11,473,112) (4,844,827) (35,168,153)
Other income (expense):
Interest income................................. 36,339 17,961 419,378
Interest expense................................ (610,719) (138,109) (978,296)
------------ ----------- ------------
(574,380) (120,148) (558,918)
------------ ----------- ------------
Loss before provision for income taxes............ (12,047,492) (4,964,975) (35,727,071)
Provision for income taxes (note 10).............. -- -- --
------------ ----------- ------------
Net loss.......................................... (12,047,492) (4,964,975) (35,727,071)
------------ ----------- ------------
Deemed dividend on preferred stock................ (458,571) (458,571) --
Accretion on mandatorily redeemable convertible
preferred stock................................. -- -- (9,846)
------------ ----------- ------------
Net loss applicable to common shareholders........ $(12,506,063) $(5,423,546) $(35,736,917)
============ =========== ============
Net loss per share, basic and diluted............. $ (6.57) $ (4.36) $ (13.07)
============ =========== ============
Pro forma net loss per share, basic and diluted... $ (2.82) $ (1.98)
============ ============
Shares used to compute net loss per share:
Basic and diluted............................... 1,902,823 1,244,364 2,735,056
Pro forma basic and diluted..................... 4,430,657 18,033,321
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 67
800.COM, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN UNEARNED SHAREHOLDERS' ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE DEFICIT EQUITY (DEFICIT)
--------- ------- ---------- ------------ ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 30, 1997
(date of inception)....... -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock.... 900,000 9,000 (8,000) -- -- -- 1,000
--------- ------- ---------- ----------- -------- ------------ ------------
Balance, March 31, 1998..... 900,000 9,000 (8,000) -- -- -- 1,000
Issuance of common stock.... 2,750,000 27,500 233,172 -- -- -- 260,672
Stock options and warrants
exercised................. 301,250 3,013 9,865 -- (12,500) -- 378
Deemed dividend on preferred
stock..................... -- -- (458,571) -- -- -- (458,571)
Warrants issued for bridge
loans and to
consultants............... -- -- 1,563,094 -- -- -- 1,563,094
Unearned stock-based
compensation.............. -- -- 501,400 (501,400) -- -- --
Amortization of stock-based
compensation.............. -- -- -- 138,358 -- -- 138,358
Net loss.................... -- -- -- -- -- (12,047,492) (12,047,492)
--------- ------- ---------- ----------- -------- ------------ ------------
Balance, March 31, 1999..... 3,951,250 39,513 1,840,960 (363,042) (12,500) (12,047,492) (10,542,561)
Payment of shareholders'
receivable................ -- -- -- -- 11,563 -- 11,563
Accretion of preferred
shares.................... -- -- (9,846) -- -- -- (9,846)
Stock options and warrants
exercised................. 305,746 3,057 280,605 -- -- -- 283,662
Common stock repurchased.... (18,750) (188) (749) -- 937 -- --
Warrants issued for bridge
loans and to
consultants............... -- -- 1,785,486 -- -- -- 1,785,486
Unearned stock-based
compensation.............. -- -- 1,853,983 (1,853,983) -- -- --
Amortization of stock-based
compensation.............. -- -- -- 902,547 -- -- 902,547
Net loss.................... -- -- -- -- -- (35,727,071) (35,727,071)
--------- ------- ---------- ----------- -------- ------------ ------------
Balance, December 31, 1999
(unaudited)............... 4,238,246 $42,382 $5,750,439 $(1,314,478) $ -- $(47,774,563) $(43,296,220)
========= ======= ========== =========== ======== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 68
800.COM, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31,
MARCH 31, ---------------------------
1999 1998 1999
------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(12,047,492) $(4,964,975) $(35,727,071)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................... 322,069 160,253 965,885
Amortization of stock-based deferred compensation....... 138,358 19,414 902,547
Issuance of warrants for goods and services............. 1,563,094 206,001 1,785,486
Issuance of common stock for operating expenses......... 187,498 187,498 --
Changes in operating assets and liabilities:
Restricted cash....................................... (130,000) -- (9,170,000)
Receivables........................................... (29,032) (329,735) (474,834)
Inventory............................................. (1,027,822) (2,023,561) (8,547,006)
Prepaid expenses and other current assets............. (74,591) (58,185) (1,544,205)
Accounts payable...................................... 910,525 809,205 5,821,633
Accrued liabilities................................... 144,529 59,013 1,122,137
------------ ----------- ------------
Net cash used by operating activities.............. (10,042,864) (5,935,072) (44,865,428)
------------ ----------- ------------
Cash flows used by investing activities:
Purchases of property and equipment....................... (1,928,696) (1,644,554) (4,727,571)
Increase in other assets.................................. (286,364) (116,114) 10,912
------------ ----------- ------------
Net cash used by investing activities.............. (2,215,060) (1,760,668) (4,716,659)
------------ ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of note payable to bank............ 1,000,000 500,000 --
Principal payments on note payable to bank................ (500,000) (500,000) (500,000)
Proceeds from issuance of notes payable to investors...... -- 3,640,000 --
Proceeds from issuance of capital lease obligations on
sale leaseback.......................................... 216,907 216,907 --
Principal payments on capital lease obligations........... (62,607) (44,395) (85,442)
Principal payments on long-term debt...................... (1,410) (348) (3,363)
Proceeds from issuance of preferred stock................. 19,476,006 3,950,036 57,588,032
Proceeds from issuance of common stock.................... 378 -- 283,662
Proceeds from note receivable issued for stock............ -- -- 11,563
------------ ----------- ------------
Net cash flows provided by financing activities.... 20,129,274 7,762,200 57,294,452
------------ ----------- ------------
Net increase in cash and cash equivalents.......... 7,871,350 66,460 7,712,365
Cash and cash equivalents at beginning of period............ 1,000 1,000 7,872,350
------------ ----------- ------------
Cash and cash equivalents at end of period.................. $ 7,872,350 $ 67,460 $ 15,584,715
============ =========== ============
Supplemental disclosure of cash flow information:
Cash payments during the year for interest................ $ 120,455 $ 34,221 $ 39,386
============ =========== ============
Supplemental disclosure of noncash investing and financing
activities:
Acquisition of leased equipment........................... $ 33,093 $ 33,093 $ --
Acquisition of property for long-term debt................ 27,475 27,475 --
Common stock issued for assets acquired................... 73,174 73,174 --
Common stock issued for note receivable................... 12,500 12,500 --
Common stock repurchased for note receivable.............. -- -- 937
Accretion of Series B & Series C preferred stock.......... -- -- 9,846
Deemed dividend on preferred stock........................ (458,571) (458,571) --
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 69
800.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
DESCRIPTION OF BUSINESS
800.COM, Inc. (the "Company") is an Oregon corporation which was
incorporated on December 30, 1997. However, the Company did not commence
operations until April 1998. The Company is an Internet retailer of consumer
electronics, and movie, music and video game products and sells to consumers in
the U.S. and Canada.
INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet as of December 31, 1999, the statements of
operations and cash flows for the nine months ended December 31, 1998, and 1999,
and the statement of shareholders' equity for the nine months ended December 31,
1999, are unaudited, but in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of results for the interim periods. Results for the nine months
ended December 31, 1999, are not necessarily indicative of the results that may
be expected for the year ending March 31, 2000.
CASH EQUIVALENTS
The Company considers short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents of
$7,777,482 as of March 31, 1999, consist of institutional money market funds.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the average cost method. The Company records an allowance to reduce the
carrying amounts of inventory to estimated net realizable value. As of March 31,
1999, and December 31, 1999, the allowance was zero and $125,000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation and
amortization, which includes the amortization of assets recorded under capital
leases. Depreciation on equipment is calculated on the straight-line method over
the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
NUMBER
OF YEARS
--------
<S> <C>
Computer equipment.......................................... 3
Software.................................................... 3
Equipment and vehicles...................................... 5 - 7
</TABLE>
OTHER ASSETS
Other assets consist principally of deposits on equipment and pending
trademark filings.
F-7
<PAGE> 70
800.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of merchandise, net of product
returns, promotional coupons and discounts. The Company has a 30-day return
policy for most products.
COST OF GOODS SOLD
Cost of goods consists primarily of the cost of products sold, inbound
freight expenses, inventory shrinkage, and inventory obsolescence costs.
INFORMATION SYSTEMS
Information systems expenses consist primarily of payroll and related costs
associated with Web site design, systems, operations consultants and
telecommunications infrastructure. The Company capitalizes the costs of
internally developed software in accordance with Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use".
ADVERTISING
The Company recognizes advertising expenses in accordance with Statement of
Position 93-7 "Reporting on Advertising Costs." As such, the Company expenses
the cost of communicating advertising in the period in which the advertising
space or airtime is used. Internet advertising expenses are recognized based on
the terms of the individual agreements, but generally over the number of
impressions received over the total number of contracted impressions, or on a
straight-line basis over the term of the contract. Advertising expenses totaled
$787,800 for the year ended March 31, 1999, and $18,727,489 and $576,820 for the
nine months ended December 31, 1999, and 1998, respectively.
INCOME TAXES
The Company uses the asset and liability method to account for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rate is recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting
for Stock-Based Compensation, defines a fair value based method of accounting
for an employee stock option or similar instrument. Under the fair value based
method, compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually the
vesting period. However, SFAS 123 also allows an entity to continue to measure
compensation cost using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25 (Opinion 25), Accounting for Stock Issued to
Employees. Under the intrinsic value based method, compensation cost is the
excess, if any, of the quoted market price of the stock at grant date or other
measurement date over the amount an employee must pay to acquire the stock.
Entities electing to remain with the accounting in Opinion 25
F-8
<PAGE> 71
800.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
must make pro forma disclosures of net income and, if presented, earnings per
share, as if the fair value based method had been applied. The Company has
elected to continue to apply the prescribed accounting in Opinion 25. The
Company accounts for stock-based compensation issued to non-employees in
accordance with provisions of SFAS 123 and Emerging Issues Task Force No. 96-18,
"Accounting for Equity Instruments that Are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling Goods or Services."
RISKS AND USE OF ESTIMATES
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 at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
The Company operates in the online retail industry, which is new, rapidly
evolving and intensely competitive. The Company competes primarily with
traditional retail outlets and other entities that maintain similar commercial
Web sites. There can be no assurance that the Company will achieve sufficient
online traffic to realize economies of scale that justify the significant
investments by third parties.
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of cash equivalents composed of
investments in money market funds with one institution.
PRO FORMA SHAREHOLDERS' EQUITY (UNAUDITED)
The accompanying pro forma shareholders' equity at December 31, 1999
reflects 1) the conversion of all then outstanding shares of preferred stock
into an aggregate of 19,983,425 shares of common stock and 2) the exercise of
vested warrants for 1,541,768 shares of common stock which are forfeited if not
exercised prior to the initial public offering.
NET LOSS PER SHARE
Basic net loss per share available to common shareholders is computed by
dividing the net loss available to common shareholders for the period by the
weighted average number of shares of common stock outstanding during the period
reduced for shares subject to repurchase. Diluted net loss per share available
to common shareholders is computed by dividing the net loss available to common
shareholders for the period by the weighted average number of shares of common
and potential common equivalent shares outstanding during the period. The
calculation of diluted net loss per share excludes potential common shares if
the effect is antidilutive. Potential common shares are composed of common stock
subject to repurchase rights, incremental shares of common stock issuable upon
the exercise of stock options and warrants and incremental shares of common
stock issuable upon conversion of preferred stock. For the nine months ended
December 31, 1999, net loss per share available to common shareholders includes
a charge of $9,846 to reflect accretion on the preferred stock recorded in
connection with Series B and C preferred stock financings.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended March 31, 1999, and the
nine months ended December 31, 1999, is computed using the weighted average
number of common shares outstanding, and reflects 1) the automatic conversion of
all then outstanding shares of preferred stock into common stock,
F-9
<PAGE> 72
800.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
and 2) the exercise of vested warrants which are forfeited if not exercised
prior to the initial public offering, as if such conversion occurred at April 1,
1999, or at date of original issuance, if later.
The following table sets forth the computation of basic and dilutive, and
pro forma basic and dilutive, net loss per share available to common
shareholders for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
MARCH 31, ---------------------------
1999 1998 1999
-------------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Numerator:
Net loss........................................ $(12,047,492) $(4,964,975) $(35,727,071)
Deemed dividend on preferred stock.............. (458,571) (458,571) --
Accretion on preferred stock.................... -- -- (9,846)
------------ ----------- ------------
Net loss available to common shareholders......... $(12,506,063) $(5,423,546) $(35,736,917)
============ =========== ============
Denominator:
Weighted average common shares.................. 3,450,038 3,356,182 4,090,901
Shares subject to repurchase.................... (1,547,215) (2,111,818) (1,355,845)
------------ ----------- ------------
Denominator for basic and diluted calculation..... 1,902,823 1,244,364 2,735,056
============ =========== ============
Weighted average effect of pro forma securities:
Series A preferred stock..................... 1,638,356 4,000,000
Series B preferred stock..................... 179,074 7,262,442
Series C preferred stock..................... -- 2,471,841
Warrants convertible to common stock......... 710,404 1,563,982
------------ ------------
Denominator for pro forma basic and diluted
calculation..................................... 4,430,657 18,033,321
============ ============
Net loss per share available to common
shareholders:
Basic and diluted............................ $ (6.57) $ (4.36) $ (13.07)
============ =========== ============
Pro forma basic and diluted.................. $ (2.82) $ (1.98)
============ ============
</TABLE>
The above basic and dilutive shares are the same because inclusion of
potentially diluted securities would be anti-dilutive. Such potentially diluted
securities consist of stock options and preferred stock. The number of shares of
stock options excluded from the dilutive shares calculation was 1,026,000,
756,000 and 2,107,804, respectively, for the year ended March 31, 1999, and the
nine months ended December 31, 1998 and December 31, 1999. The number of shares
of preferred stock excluded from the dilutive share calculation was 1,817,430,
865,455, and 13,734,283 for the year ended March 31, 1999 and the nine months
ended December 31, 1998 and 1999, respectively.
(2) RESTRICTED CASH
The Company's credit card merchant holds cash of $130,000 and $300,000 in
reserve as of March 31, 1999 and December 31, 1999, respectively. The reserve
will be used in the event that the Company's credit card chargebacks exceed the
credit card charges. To date the Company has not experienced a material amount
of chargebacks. Additionally, the Company was required to deposit $9,000,000 in
a certificate of deposit account relative to a letter of credit. See Note 12.
F-10
<PAGE> 73
800.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) RELATED PARTY TRANSACTIONS
The Company had related party transactions with a shareholder for the
rental of office space and accounting and media production services. The total
expense related to these services was $93,907 for the year ended March 31, 1999.
As of March 31, 1999, the Company had an accounts receivable of $17,367 due from
this shareholder.
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of March 31, 1999:
<TABLE>
<S> <C>
Computer equipment.......................................... $ 706,199
Software.................................................... 1,284,515
Equipment and vehicles...................................... 71,724
----------
2,062,438
Less accumulated depreciation and amortization.............. 318,369
----------
$1,744,069
==========
</TABLE>
(5) NOTE PAYABLE TO BANK
The Company had a $500,000 revolving line, with interest at prime plus 1%
(prime 7.75% on March 31, 1999). This line expired on December 13, 1999. Prior
to expiration, the line was secured by all of the Company assets and required a
minimum unrestricted cash balance of $500,000.
In connection with the revolving line agreement, the bank required that the
obligations thereunder be guaranteed by certain individuals. To serve as an
inducement to the guarantors, in June 1998, the Company issued warrants to
purchase up to 500,000 shares of the Company's common stock at an exercise price
of $.10. The warrants are immediately exercisable, but do expire under certain
circumstances. The fair value of the warrants was determined to be $40,000 and
was amortized to interest expense from issuance until November 1998. In November
1998, the guarantee expired.
The fair values of the above warrants were calculated at the time of
issuance using the Black-Scholes model with the following assumptions: expected
life of 5 years; risk free interest rate of 6.0%; no dividends during the term
and volatility of 100%.
(6) LEASES
The Company is obligated under capital leases for computer hardware and
software that expire in October 2000. In March and August 1999, the Company
entered into an office and a warehouse lease, both of which have been classified
as an operating lease and are included in the data presented below. Total rent
expense for the year ended March 31, 1999, was $50,186.
F-11
<PAGE> 74
800.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments as of March 31, 1999, are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
-------- ----------
<S> <C> <C>
Year ending March 31:
2000...................................................... $127,548 $ 777,774
2001...................................................... 74,358 1,382,449
2002...................................................... -- 515,546
2003...................................................... -- 530,932
2004...................................................... -- 501,257
-------- ----------
Total minimum lease payments...................... 201,906 $3,707,958
==========
Less interest at 9.09%...................................... 14,513
--------
Present value of net minimum capital lease
payments........................................ 187,393
Less current portion of obligations under capital leases.... 115,236
--------
Obligations under capital leases, excluding
current portion................................. $ 72,157
========
</TABLE>
Equipment under capital lease arrangements was $173,572 as of March 31,
1999, with related amortization of $53,392.
(7) DEBT
LONG-TERM DEBT
Long-term debt consists of the following as of March 31, 1999:
<TABLE>
<S> <C>
10.75% loan, $594 monthly installments, including interest,
until November 2003, secured by vehicle................... $26,065
Less current portion........................................ 4,545
-------
Long-term debt, less current portion.............. $21,520
=======
</TABLE>
The aggregate maturities of long-term debt for each of the five years
subsequent to March 31, 1999 are as follows:
<TABLE>
<S> <C>
Year ending March 31:
2000..................................................... $ 4,545
2001..................................................... 5,058
2002..................................................... 5,630
2003..................................................... 6,266
2004..................................................... 4,566
-------
$26,065
=======
</TABLE>
CONVERTIBLE PROMISSORY NOTES
In September 1998, the Company issued convertible promissory notes with an
aggregate face amount of $1,070,000. The notes accrued interest at 5.42% per
annum and were convertible upon the sale of Series A Preferred Stock ("Series
A") or redeemable December 31, 1998. As an incentive to reduce the conversion
ratio from the amount originally stated in the promissory notes, in October
1998, the Company issued warrants convertible into 458,571 shares of the
Company's common stock with an exercise price of $1.00 in the aggregate. The
warrants were issued as an incentive for certain buyers to purchase Series A.
F-12
<PAGE> 75
800.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The warrants are exercisable prior to the earliest of (a) October 30, 2008, (b)
a corporate transaction defined as a sale of substantially all the assets of the
Company or the acquisition of the Company and (c) an initial public offering
with a price per share of $5.00 or above and aggregate offering proceeds paid to
the Company in excess of $10,000,000. The fair value of the warrant was
determined to be $458,571 and was recorded as a deemed dividend on the Series A.
In October 1998, the notes were converted into 1,070,000 shares of Series A.
In December 1998 and January 1999, the Company issued convertible
promissory notes with an aggregate face amount of $5,500,000. The notes, as
amended, incurred interest at 4.33% per annum and were convertible upon the sale
of Series B Preferred Stock ("Series B") or redeemable April 1, 1999. As an
incentive to enter into the promissory note, the Company issued warrants to
purchase 275,000 shares of common stock with an exercise price per share of
$.10. The warrants are exercisable prior to the earliest of (a) ten years from
the date of issuance, (b) a corporate transaction defined as a sale of
substantially all the assets of the Company or the acquisition of the Company
and (c) an initial public offering with a price per share of $5.00 or above and
aggregate offering proceeds paid to the Company in excess of $10,000,000. The
fair value of the warrants was determined to be $434,500 and was amortized to
interest expense from issuance until March 1999. In March 1999, the holders of
the promissory notes converted the outstanding balance of $5,500,000 into
2,488,688 shares of Series B.
In August 1999, the Company issued a convertible promissory note with a
face amount of $7,500,000. The note incurred interest at 7.5% per annum and was
convertible upon the sale of Series C Preferred Stock ("Series C") or redeemable
November 1, 1999. As an incentive to enter into the promissory note, the Company
issued a warrant to purchase common stock. The number of shares of common stock
issuable under the warrant was 170,197 with an exercise price per share of
$6.61. The warrants are exercisable prior to the earlier of (a) August 5, 2009
and (b) the closing an initial public offering with a price per share of $10.00
or above and aggregate offering proceeds paid to the Company in excess of
$20,000,000. The fair value of the warrant was determined to be $818,648 and was
amortized to interest expense from issuance until October 1999. In October 1999,
the holder of the promissory note converted the outstanding balance of
$7,500,000 into 1,134,644 shares of Series C.
The fair values of the above warrants were calculated at the time of
issuance using the Black-Scholes pricing model with the following assumptions:
expected life of 10 years; risk free interest rate of 6.4%; no dividends during
the term and volatility of 100%.
In March 1999, the Company issued convertible promissory notes with an
aggregate face amount of $3,000,000. The notes incurred interest at 8.75% per
annum and were convertible upon the sale of Series B or redeemable April 19,
1999. In March 1999, the notes were converted into 1,357,466 shares of Series B.
(8) PREFERRED STOCK
The Company issued 4,000,000, 7,262,442 and 8,720,983 of Series A, B and C
at a share price of $1.00, $2.21, and $6.61, respectively, in October and
November 1998, March 1999, and October and November 1999, respectively. As of
December 31, 1999, the Company has preferred shares of 4,222,844 remaining as
authorized but undesignated.
The Series A, B and C shareholders are entitled to receive dividends, prior
and in preference to any declaration or payment of any dividend on common stock,
at a rate of 10% of the original issue price, when and if declared by the Board
of Directors. In addition to the preceding, in any year a dividend is declared
and paid on common stock, the Board of Directors must simultaneously declare and
pay a dividend on each outstanding share of Series A, B and C equal to the
dividend to be declared or paid on
F-13
<PAGE> 76
800.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
each share of common stock times the number of shares of common stock into which
the Series A, B and C is then convertible. The right to dividends is not
cumulative.
Upon the voluntary or involuntary dissolution, liquidation or winding up of
the Company, the assets of the Company will be distributed in the following
order: 1) ratably to the Series B and C shareholders up to the Series B original
issue price, then ratably to the Series C shareholders up to the Series C
original issue price; 2) ratably to the Series A shareholders up to the original
issue price; 3) ratably to the Series A, B and C and common stock shareholders
as though all the Series A, B and C were converted to shares of common stock, up
to a maximum of three times the original issue price for Series A stock; 4)
ratably to the Series B and C and common stock shareholders as though the Series
B were converted to shares of common stock, up to a maximum of three times the
original issue price for Series B; 5) ratably to the Series C and common stock
shareholders as though the Series C were converted to shares of common stock, up
to a maximum of three times the original issue price for Series C; and finally,
6) ratably to the common stock shareholders.
Series A, B and C may, at the option of the shareholder, be converted at
any time into common stock equal to the respective original issue price,
adjusted from time to time for certain events. Each share of Series A and B will
automatically convert to common stock upon the public offering of stock of the
Company, where the price per share is at least $6.63 and the aggregate gross
offering proceeds to the Company are in excess of $15,000,000. Each share of
Series C will automatically convert to common stock upon the public offering of
stock of the Company, where the price per share is at least twice the original
issue price for Series C and the aggregate gross offering proceeds to the
Company are in excess of $15,000,000. The Company has reserved for such number
of authorized but unissued shares of common stock, to effect the conversion of
all outstanding shares of Series A, B and C.
At any time after March 1, 2004, the Series B and Series C shareholders
may, with a majority vote, request the Company to redeem the issued and
outstanding shares of Series B and C for the original issue price plus dividends
declared, but not paid. Accretion to record the value of the Series B and C at
their redemption values on the scheduled redemption date is calculated using the
effective interest method.
No share or shares of Series A, B or C converted, repurchased, redeemed or
otherwise acquired by the Company will be reissued. All such shares will be
canceled, retired and eliminated from the shares which the Company is authorized
to issue.
Each holder of Series A, B and C are entitled to vote on all matters and
shall be entitled to that number of votes equal to the number of shares of
common stock into which such holder's shares could be converted.
The consent of at least 60 percent of the Series A, B and C, voting
together as a single class, is necessary to (i) declare or pay dividends or
otherwise distribute any shares of common stock, (ii) redeem, purchase or
otherwise acquire equity securities except as allowed by the articles of
incorporation, (iii) increase the number of directors of the corporation in
excess of seven, (iv) effect a consolidation or merger with another corporation
or entity in which the Company would own less than 50% of the voting securities
of the surviving corporation, (v) make an investment in another entity where the
cost to the Company would exceed $100,000 or (vi) change the percentage of
Series A, B or C required to approve the foregoing actions set forth in clauses
(i) through (v).
In connection with a promotional agreement entered into in October 1999,
the Company issued to an advertising and promotional company a warrant to
purchase 200,000 shares of Series C. A portion of the warrant was fully vested
and exercisable upon signing of the contract. The remaining unvested portion of
the warrant vests 8.33% on the seventh through the twelfth month following the
date of grant. As of
F-14
<PAGE> 77
800.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999 the Company has expensed $562,000. The fair value of the
warrant was calculated using the Black-Scholes model.
(9) SHAREHOLDERS' EQUITY
COMMON STOCK
On May 8, 1998, the Board of Directors approved a 900 for one stock split
of the Company's common stock. All common share and per share data in the
accompanying financial statements have been adjusted to give effect to the stock
split.
During May 1998, the Company issued 2,750,000 shares of common stock in
exchange for certain assets and services received. The fair value of the common
stock of $260,672 was estimated based on the value of the assets and services
received.
UNEARNED STOCK-BASED COMPENSATION
In connection with certain stock option grants, during the year ended March
31, 1999, and the nine months ended December 31, 1999, the Company recognized
unearned stock-based compensation totaling $501,400 and $1,853,983,
respectively, which is being amortized over the vesting periods of the related
options, which is generally four years. Amortization expense recognized for the
year ended March 31, 1999, and the nine months ended December 31, 1999, totaled
approximately $138,358 and $902,547, respectively. In determining the fair
market value on each grant date, the Company considered among other things, the
relative level of revenues and other operating results, the absence of a public
trading market for the Company's securities and the competitive nature of the
Company's market.
STOCK RESTRICTION AGREEMENT
The Company has a stock restriction agreement, which includes restrictions
on the transfer of the Company's common stock issued pursuant to the Company's
1998 stock option plan. Before selling the common stock, the shareholder must
first offer the Company the right of first refusal. In the event of a
termination or an involuntary transfer, the Company has the right to purchase
all, but not less than all, of the shares at fair market value. The shareholder
may transfer all or part of his or her shares to his or her spouse or lineal
descendants provided that the transferee signs a stock restriction agreement.
The stock restriction agreement lapses upon an initial public offering.
WARRANTS
In addition to the warrants issued as discussed in Notes 7 and 8, the
Company has issued warrants to certain creditors, shareholders and consultants
to acquire shares of the Company's common stock at prices ranging from $.00 to
$6.61 per share. The majority of these warrants are exercisable immediately and
have a life of five to ten years from date of issuance. The warrants were valued
using the Black-Scholes model.
F-15
<PAGE> 78
800.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table provides the warrant activity for the issuance of
common stock for the periods ended March 31, 1999 and December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF
COMMON RANGE OF
SHARES EXERCISE
DESCRIPTION ISSUABLE PRICES
----------- --------- -----------
<S> <C> <C>
Granted..................................................... 1,614,988 $.00 - 1.00
Exercised................................................... 51,250 .00 - .10
---------
Balance as of 3/31/99....................................... 1,563,738 .00 - 1.00
Granted..................................................... 250,197 2.21 - 6.61
Exercised................................................... 255,500 .10 - 2.21
---------
Balance as of 12/31/99 (unaudited).......................... 1,558,435 .00 - 1.00
=========
</TABLE>
Excluded from the above table are warrants granted to a consultant to
acquire up to 220,000 shares of the Company's common stock. The vesting of these
warrants is based on the consultant achieving certain milestones and the price
will be set at the then fair value of the common stock as determined by the
Board of Directors. The milestones were achieved in February 2000.
STOCK OPTIONS
In 1998, the Company adopted a stock option plan (the Plan) pursuant to
which the Company's Board of Directors may grant incentive stock options to
employees, or nonqualified stock options to directors, consultants, agents,
advisors and independent contractors. The Plan authorizes grants of options to
purchase up to 2,478,568 shares of authorized but unissued common stock. As of
March 31, 1999, there were 1,202,568 additional shares available for grant under
the Plan. An additional 1,000,000 shares were authorized for stock option grants
in February 2000.
Stock options have a four-year term, vesting 25% after one year and 2.08%
for each full month thereafter. A limited number of stock options are subject to
accelerated vesting based on a change in control of the Company.
Stock option activity for the periods ending March 31, 1999, and December
31, 1999, is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED- AVERAGE
OF SHARES EXERCISE PRICE
--------- -----------------
<S> <C> <C>
Balance as of March 31, 1998............................ -- $ --
Granted................................................. 1,291,500 .08
Exercised............................................... 250,000 .05
Forfeited............................................... 15,500 .10
---------
Balance as of March 31, 1999............................ 1,026,000 .08
Granted................................................. 1,186,550 3.59
Exercised............................................... 50,246 1.78
Forfeited............................................... 54,500 .43
---------
Balance as of December 31, 1999 (unaudited)............. 2,107,804 2.01
=========
</TABLE>
As of March 31, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $.05-$.23 and 3.38 years,
respectively.
F-16
<PAGE> 79
800.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of March 31, 1999, the number of options exercisable was 20,000 and the
weighted-average exercise price of those options was $.10.
The per share weighted-average fair value of stock options granted during
the year ending March 31, 1999 was $.44 on the date of grant using the minimum
value method, with the following weighted-average assumptions: expected dividend
yield 0%, risk-free interest rate of 4.5%, and an expected life of 5.5 years.
Because the determination of fair value of all options granted after such
time as the Company becomes a public entity will include an expected volatility
factor in addition to the factors described in the preceding paragraph, the
above results may not be representative of future periods.
The Company applies APB Opinion No. 25 in accounting for its Plan. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net loss available to
common shareholders and net loss per share would have been increased to the pro
forma amount indicated below:
<TABLE>
<S> <C>
Net loss available to common shareholders:
As reported............................................... $(12,506,063)
============
Pro forma................................................. $(12,532,963)
============
Basic and diluted net loss per share available to common
shareholders:
As reported............................................... $ (6.57)
============
Pro forma................................................. $ (6.59)
============
</TABLE>
(10) INCOME TAXES
The difference between the income tax benefit at the federal statutory rate
of 34% and the Company's effective tax rate is due primarily to the valuation
allowance established to offset the deferred tax assets. The provision for
income taxes is different than the amount computed using the applicable
statutory federal income tax rate with the difference summarized below:
<TABLE>
<S> <C>
Tax benefit at statutory rate............................... (34.0)%
Change in valuation allowance for deferred tax assets....... 38.3%
State income tax benefit, net of federal tax................ (4.4)%
Other....................................................... .1%
------
$ --
======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets as of March 31, 1999, are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Federal and state operating loss carryforwards............ $ 4,102,000
Property and equipment -- due to depreciation
differences............................................ 2,000
Inventory................................................. 27,000
Other..................................................... 2,000
-----------
Total gross deferred tax assets................... 4,133,000
Less valuation allowance.................................. (4,133,000)
-----------
Net deferred tax assets........................... $ --
===========
</TABLE>
F-17
<PAGE> 80
800.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The valuation allowance for deferred tax assets as of April 1, 1998, was
zero. The net change in the total valuation allowance for the year ended March
31, 1999, was an increase of $4,133,000. Management believes that based on the
loss incurred for the year ended March 31, 1999, and other factors, the weight
of available evidence indicates that it is more likely than not that the Company
will not be able to realize its deferred tax assets, and thus a full valuation
allowance has been recorded at March 31, 1999.
A provision of the Tax Return Act of 1986 requires the utilization of net
operating losses and credits be limited when there is a change of more than 50%
in ownership of the Company. Such changes occurred with the sale of preferred
and common stock during the year ended March 31, 1999. Accordingly, the
utilization of the net operating loss and credit carryforwards generated from
periods prior to March 22, 1999 is limited.
As of March 31, 1999, the Company has federal and state net operating loss
and federal and state credit carryforwards of approximately $10,696,000. Such
carryforwards will expire in 2018 and 2019 if not used by the Company to reduce
income taxes payable in future periods.
(11) RETIREMENT PLAN
The Company instituted a 401(k) Plan as of January 1, 1999. All employees,
twenty years of age or older, are eligible to participate in the 401(k) Plan
after sixty days of employment. Employee contribution elections range from 1% to
20%. Any employer contributions vest at 25% per year, fully vested after four
years. There were no employer contributions for the year ended March 31, 1999 or
for the nine months ended December 31, 1999.
(12) COMMITMENTS
In July 1999, the Company entered into a 24-month advertising and promotion
agreement with an Internet service company and, in October 1999, entered into
two 12-month advertising and promotion agreements with Internet companies. In
connection with these agreements, the Company is obligated to make aggregate
initial cash payments of $2.1 million upon execution and additional aggregate
cash payments of $8.3 million and $9.5 million during fiscal years ending March
31, 2000 and March 31, 2001, respectively.
The Company issued a standby letter of credit for $9,000,000 to Lowe &
Partners, for advertising costs, for the period October 29, 1999 through January
31, 2000. The letter of credit has expired and has not been renewed.
(13) SUBSEQUENT EVENTS
SUPPLIER AGREEMENT
The Company entered into a supplier agreement in January 2000, to become an
authorized distributor of electronics products through the Company's internet
site. As consideration for the contract, the dealer received a warrant for
250,000 shares of the Company's common stock with an exercise price of $6.61 per
share. The warrant is immediately exercisable but does expire under certain
circumstances. The fair value of the warrant, as calculated using the
Black-Scholes model, was $1,277,500. The Company has recorded the value of the
warrant and will amortize the cost over the life of the dealer contract.
Additionally, the Company is also obligated to issue up to 50,000 more
warrants of the Company's common stock if the Company reaches a certain sales
level, and if the level of sales of the dealer's products represents a certain
percentage of those sales by March 31, 2002.
F-18
<PAGE> 81
800.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SERIES C PREFERRED STOCK
The Company is in the process of obtaining approval from the Series C
shareholders to waive the provision that prevents automatic conversion of Series
C to common stock in the event that the public offering price is not at least
two times the Series C issuance price.
SERIES D PREFERRED STOCK
In March 2000, the Company agreed to issue 3,165,995 shares of Series D
Preferred Stock ("Series D") for $7.50 per share. The terms and conditions of
this offering are substantially the same as those for the Series C offering
described in Note 8.
The terms of the offering also provide that the shareholders of Series C
and D have combined rights which are senior to the individual rights granted to
the Series C and D shareholders under certain circumstances, and that any
amendment or waiver that is detrimental to the holders of Series D in a manner
different than any other holder of preferred stock shall require the written
consent of Series D shareholders.
The terms and conditions pertaining to the issuance of Series D outlined in
the previous note in some cases modify the terms and conditions of the Series C
described in Note 8. The terms of the Series D specify that the combined rights
of shareholders of Series C and Series D shall be senior to the individual
rights granted to Series C and Series D shareholders pertaining to certain
registration rights and right of first offer expiration upon the Company's
initial public offering.
F-19
<PAGE> 82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE PAID
-----------------
<S> <C>
SEC registration fee........................................ $ 19,800
NASD filing fee............................................. 8,000
Nasdaq National Market listing fee.......................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky fees and expenses.................................. *
Transfer agent and registrar fees........................... *
Miscellaneous expenses...................................... *
Total............................................. $ *
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As an Oregon corporation, the Registrant is subject to the laws of the
State of Oregon governing private corporations and the exculpation from
liability and indemnification provisions contained therein. Pursuant to Section
60.047(2)(d) of the Oregon Revised Statutes ("ORS"), the Registrant's Restated
Articles of Incorporation to be in effect upon the closing of the offering (the
"Articles") eliminate the liability of the Registrant's directors to the
Registrant or its shareholders except for any liability related to (i) breach of
the duty of loyalty; (ii) acts or omissions not in good faith or that involve an
intentional transaction from which the director derived an improper personal
benefit.
ORS Section 60.391 allows corporations to indemnify their directors and
officers against liability where the director or officer has acted in good faith
and with a reasonable belief that actions taken were in the best interests of
the corporation or at least not opposed to the corporation's best interests and,
if in a criminal proceeding, the individual had no reasonable cause to believe
the conduct in question was unlawful. Under ORS Sections 60.387 to 60.414,
corporations may not indemnify a director or officer against liability in
connection with a claim by or in the right of the corporation or for any
improper personal benefit in which the director or officer was adjudged liable
to the corporation. ORS Section 60.394 mandates indemnification for all
reasonable expenses incurred in the successful defense of any claim made or
threatened whether or not such claim was by or in the right of the corporation.
Finally, pursuant to ORS Section 60.401, a court may order indemnification in
view of all the relevant circumstances, whether or not the director or officer
met the good-faith and reasonable belief standards of conduct set out in ORS
Section 60.391.
ORS Section 60.414 also provides that the statutory indemnification
provisions are not deemed exclusive of any other rights to which directors or
officers may be entitled under a corporation's articles of incorporation or
bylaws, any agreement, general or specific action of the board of directors,
vote of shareholders or otherwise.
The Articles provide that the Registrant is required to indemnify to the
fullest extent not prohibited by law any current or former director who is made,
or threatened to be made, a party to an action or proceeding by reason of the
fact that such person serves or served as a director of the Registrant. The
Articles also provide that the Registrant is permitted to indemnify to the
fullest extent not prohibited by
II-1
<PAGE> 83
law any current or former officer who is made, or threatened to be made, a party
to an action or proceeding by reason of the fact that such person is or was an
officer of the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Registrant since December
30, 1997 (the date the Registrant was incorporated), involving sales of the
Registrant's securities that were not registered under the Securities Act.
ISSUANCES AT FORMATION
In December 1997, the Registrant issued to its founder 900,000 shares of
common stock at a price of $0.001 per share. The Registrant relied on Section
4(2) for this sale.
In May 1998, the Registrant issued to one accredited investor 2,750,000
shares of common stock and warrants to purchase 500,000 shares of common stock
at an exercise price of $0.01 per share. The Registrant relied on Section 4(2)
for this sale.
OTHER WARRANT ISSUANCES
In June 1998, the Registrant issued to one accredited investor a warrant to
purchase a total of 16,667 shares of common stock at an exercise price of $0.15
per share. The Registrant relied on Section 4(2) for this sale.
In June 1998, the Registrant issued to five accredited investors warrants
to purchase a total of 500,000 shares of common stock at an exercise price of
$0.10 per share. The Registrant relied on Rule 506 for these sales. A Form D was
filed with the Commission for these sales.
In July 1998, the Registrant issued to one accredited investor warrants to
purchase a total of 22,250 shares of common stock at an exercise price of $1.00
per share. The Registrant relied on Section 4(2) for this sale.
In connection with consulting and other services provided to the
Registrant, in October 1998 and January 1999, the Registrant issued to five
service providers warrants to purchase a total of 122,500 shares of common
stock. The exercise price was an aggregate of $1.00 with respect to 47,500 of
these warrants; $0.10 per share with respect to 42,500 of these warrants; and
$1.00 per share with respect to 32,500 of these warrants. The Registrant relied
on Rule 504 for these sales because the aggregate offering price of these
securities was less than $1 million. A Form D was filed with the Commission for
these sales.
In March 1999, the Registrant issued to one accredited investor warrants to
purchase a total of 440,000 shares of common stock. For 220,000 of the warrants,
the exercise price was $0.23 per share. For the second 220,000 warrants, the
exercise price was set at $ when those warrants vested in February
2000. The Registrant relied on Section 4(2) for this sale.
In May and July 1999, the Registrant issued to two accredited investors
warrants to purchase a total of 80,000 shares of common stock at an exercise
price of $2.21 per share. The Registrant relied on Rule 506 and filed a Form D
with the Commission for these sales.
In January 2000, the Registrant issued to one accredited investor warrants
to purchase a total of 250,000 shares of common stock at an exercise price of
$6.61 per share. The Registrant relied on Section 4(2) for this sale.
In connection with consulting services provided to the Registrant, in
January and March 2000, the Registrant issued to two investors warrants to
purchase a total of 31,770 shares of common stock at an
II-2
<PAGE> 84
exercise price of $0.10 per share. The Registrant relied on Rule 504 for these
sales because the aggregate offering price of these securities was less than $1
million.
SERIES A PREFERRED STOCK FINANCING
In September and October 1998, the Registrant issued to one accredited
investor convertible promissory notes in the aggregate amount of $1,070,000 and
warrants to purchase 458,571 shares of the Registrant's common stock with an
aggregate exercise price of $1.00. The Registrant relied on Section 4(2) for
this sale.
In October and November 1998, the Registrant issued a total of 4,000,000
shares of Series A preferred stock to 13 accredited investors, at a price of
$1.00 per share, for a total purchase price of $4,000,000. The Registrant relied
on Rule 506 and filed a Form D with the Commission for these sales.
SERIES B PREFERRED STOCK FINANCING
In December 1998 and January 1999, the Registrant issued to 11 accredited
investors convertible promissory notes in the aggregate amount of $5,500,000 and
warrants to purchase a total of 275,000 shares of common stock at an exercise
price of $0.10 per share. The registrant relied on Rule 506 and filed a Form D
with the Commission for these sales. These notes were converted into shares of
Series B preferred stock in March 1999.
In March 1999, the Registrant issued to one accredited investor convertible
promissory notes in the aggregate amount of $3,000,000. The Registrant relied on
Rule 506 and filed a Form D with the Commission for this sale. These notes were
converted into shares Series B preferred stock in March 1999.
In March 1999, the Registrant issued a total of 7,262,442 shares of Series
B preferred stock to 16 accredited investors at a price of $2.21 per share, for
a total purchase price of $16,049,996. The Registrant relied on Rule 506 and
filed a Form D with the Commission for these sales.
SERIES C PREFERRED STOCK FINANCING
In August 1999, the Registrant issued to one accredited investor a
convertible promissory note in the amount of $7,500,000 and a warrant to
purchase 170,197 shares of common stock at an exercise price per share of $6.61.
The Registrant relied on Rule 506 and filed a Form D with the Commission for
this sale. This note was converted into shares of Series C preferred stock in
October 1999.
In October 1999, the Registrant issued to one accredited investor warrants
to purchase a total of 200,000 shares of Series C preferred stock at an exercise
price of $6.61 per share. The Registrant relied on Section 4(2) for this sale.
In October and November 1999, the Registrant issued a total of 8,720,983
shares of Series C preferred stock to 29 accredited investors at a price of
$6.61 per share, for a total purchase price of $57,645,697. The Registrant
relied on Rule 506 and filed a Form D was filed with the Commission for these
sales.
SERIES D PREFERRED STOCK FINANCING
In March 2000, the registrant agreed to issue a total of 3,165,995 shares
of Series D preferred stock to 18 accredited investors at a price of $7.50 per
share, for a total purchase price of $23,744,963. The Registrant relied on Rule
506 and filed a Form D with the Commission for these sales.
II-3
<PAGE> 85
STOCK OPTIONS
With respect to shares granted and exercised under the Registrant's 1998
stock option plan, the Registrant relied on Rule 701 for the option grants to
and exercises by non-executive employees and consultants, because they were made
in connection with a written compensatory benefit plan. All such option grants
were made in compliance with the limitations of Rule 701, as in effect when such
option grants were made. Since May 1998 the Registrant has granted to employees
and consultants stock options under the Registrant's 1998 stock option plan as
set forth in the chart below.
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE
SUBJECT TO OPTIONS PRICE PER SHARE
------------------ ---------------
<S> <C> <C>
May 1998 to June 1998................................. 624,000 $0.05
July 1998 to January 1999............................. 478,500 0.10
February 1999......................................... 14,000 0.23
April 1999............................................ 56,050 1.00
May 1999 to July 1999................................. 287,500 2.21
July 1999 to August 1999.............................. 17,850 4.00
October 1999 to February 2000......................... 419,650 6.61
March 2000............................................ 120,250 7.50
</TABLE>
The Registrant relied on Section 4(2) with respect to the option grants to
and exercises by executive officers and directors under Registrant's 1998 stock
option plan. Each of the four individuals who was granted and/or exercised such
options was an accredited investor. We issued such options as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE
SUBJECT TO OPTIONS PRICE PER SHARE
------------------ ---------------
<S> <C> <C>
July 1998 to January 1999............................. 175,000 $0.10
June 1999 to July 1999................................ 445,000 $2.21
November 1999 to February 2000........................ 490,000 $6.61
</TABLE>
ITEM 16. EXHIBITS
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Registrant's Restated Articles of Incorporation, as
currently in effect
3.2* Form of Registrant's Restated Articles of Incorporation, to
be in effect upon the closing of the offering
3.3 Registrant's Bylaws, as currently in effect
3.4* Form of Registrant's Restated Bylaws, to be in effect upon
the closing of the offering
4.1 See Articles and of Exhibit 3.2 and Sections 2 and 6
of Exhibit 3.4
4.2 Amended and Restated Investors' Rights Agreement, dated
March , 2000
4.4* Form of Common Stock Certificate
5.1* Opinion of Perkins Coie LLP as to the legality of the
securities being registered, including consent
10.1* Registrant's 2000 Stock Incentive Plan
10.2 Registrant's 1998 Stock Option Plan
10.3(1) Advertising Insertion Order between Registrant and America
Online, Inc., dated June 30, 1999
10.4(1) Service Order between Registrant and Be Free, Inc., dated
June 14, 1999
10.5 Lease Agreement between Registrant and Bridgetown
Development Company, II, L.L.C., dated March 1, 1999
10.6 Sublease Agreement between Registrant and A&M Warehouses,
Inc., dated August 3, 1999
10.7 Employment Agreement between Registrant and Robert S.
Falcone, dated January 5, 2000
</TABLE>
II-4
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.8 Employment Agreement between Registrant and Frank Sadowski,
dated January 11, 1999
10.9 Employment Agreement between Registrant and Timothy Zuckert,
dated June 23, 1999
23.1 Consent of PricewaterhouseCoopers, independent accountants
23.2* Consent of Perkins Coie LLP (included in Exhibit 5.1)
24.1 Power of Attorney (See page II-6)
27.1 Financial Data Schedule
</TABLE>
- -------------------------
* to be filed by amendment
(1) Portions of this Exhibit have been omitted based on a request for
confidential treatment. These portions have been filed separately with the
Commission.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Portland, State of
Oregon, on March 23, 2000.
800.COM, INC.
By: /s/ GREGORY L. DREW
------------------------------------
Gregory L. Drew
Chairman of the Board,
Chief Executive Officer and
President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, Gregory L. Drew
and Robert S. Falcone, and each of them, attorneys-in-fact for the undersigned,
each with the power of substitution, for the undersigned in any and all
capacities to sign any and all amendments to this Registration Statement
(including post-effective amendments and any registration statement relating to
the same offering as this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act), and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITIES DATE
--------- ---------- ----
<S> <C> <C>
/s/ GREGORY L. DREW Chairman of the Board, March 23, 2000
- ------------------------------------------ Chief Executive Officer and President
Gregory L. Drew Principal Executive Officer
/s/ ROBERT S. FALCONE Senior Vice President, Chief Financial March 23, 2000
- ------------------------------------------ Officer and Secretary
Robert S. Falcone Principal Financial and Accounting
Officer
/s/ PETER G. BODINE Director March 23, 2000
- ------------------------------------------
Peter G. Bodine
/s/ LEN K. JORDAN Director March 23, 2000
- ------------------------------------------
Len K. Jordan
/s/ GERARD H. LANGELER Director March 23, 2000
- ------------------------------------------
Gerard H. Langeler
/s/ JAMES G. SHENNAN, JR. Director March 23, 2000
- ------------------------------------------
James G. Shennan, Jr.
/s/ SPENCER C. TALL Director March 23, 2000
- ------------------------------------------
Spencer C. Tall
</TABLE>
II-6
<PAGE> 88
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Registrant's Restated Articles of Incorporation, as
currently in effect
3.2* Form of Registrant's Restated Articles of Incorporation, to
be in effect upon the closing of the offering
3.3 Registrant's Bylaws, as currently in effect
3.4* Form of Registrant's Restated Bylaws, to be in effect upon
the closing of the offering
4.1 See Articles and of Exhibit
3.2 and Sections 2 and 6 of Exhibit 3.4
4.2 Amended and Restated Investors' Rights Agreement, dated
March , 2000
4.4* Form of Common Stock Certificate
5.1* Opinion of Perkins Coie LLP as to the legality of the
securities being registered, including consent
10.1* Registrant's 2000 Stock Incentive Plan
10.2 Registrant's 1998 Stock Option Plan
10.3(1) Advertising Insertion Order between Registrant and America
Online, Inc., dated June 30, 1999
10.4(1) Service Order between Registrant and Be Free, Inc., dated
June 14, 1999
10.5 Lease Agreement between Registrant and Bridgetown
Development Company, II, L.L.C., dated March 1, 1999
10.6 Sublease Agreement between Registrant and A&M Warehouses,
Inc., dated August 3, 1999
10.7 Employment Agreement between Registrant and Robert S.
Falcone, dated January 5, 2000
10.8 Employment Agreement between Registrant and Frank Sadowski,
dated January 11, 1999
10.9 Employment Agreement between Registrant and Timothy Zuckert,
dated June 23, 1999
23.1 Consent of PricewaterhouseCoopers, independent accountants
23.2* Consent of Perkins Coie LLP (included in Exhibit 5.1)
24.1 Power of Attorney (See page II-6)
27.1 Financial Data Schedule
</TABLE>
- -------------------------
* to be filed by amendment
(1) Portions of this Exhibit have been omitted based on a request for
confidential treatment. These portions have been filed separately with the
Commission.
<PAGE> 1
EXHIBIT 3.1
FOURTH RESTATED ARTICLES OF INCORPORATION OF
800.COM, INC.
ARTICLE 1. NAME
The name of the Corporation is 800.COM, Inc.
ARTICLE 2. DURATION
The period of the corporation's existence shall be perpetual.
ARTICLE 3. PURPOSES AND POWERS
The purpose for which the corporation is organized is to engage in any
business, trade or activity which may lawfully be conducted by a corporation
organized under the Oregon Business Corporation Act.
The corporation shall have the authority to engage in any and all such
activities as are incidental or conducive to the attainment of the purposes of
the corporation and to exercise any and all powers authorized or permitted under
any laws that may be now or hereafter applicable or available to the
corporation.
ARTICLE 4. SHARES
4.1 AUTHORIZED CAPITAL
The corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock". The total number
of shares of stock which the corporation shall have authority to issue shall be
135,000,000, consisting of 100,000,000 shares of Common Stock, $0.01 par value
per share, and 35,000,000 shares of Preferred Stock, $0.01 par value per share.
<PAGE> 2
4.2 COMMON STOCK
Subject to any preferential or other rights granted to any series of
Preferred Stock, the holders of shares of the Common Stock shall be entitled to
receive dividends out of funds of the corporation legally available therefor, at
the rate and at the time or times as may be provided by the Board of Directors.
The holders of shares of Common Stock, on the basis of one vote per share, shall
have the right to vote for the election of members of the Board of Directors of
the corporation and the right to vote on all other matters, except where a
separate class or series of the corporation's shareholders vote by class or
series.
4.3 PREFERRED STOCK
Except as otherwise expressly prohibited by the provisions of these
Articles of Incorporation of the corporation, shares of Preferred Stock may be
issued from time to time in one or more series in any manner permitted by law as
determined from time to time by the Board of Directors and stated in the
resolution or resolutions providing for the issuance thereof, prior to the
issuance of any shares thereof. The Board of Directors shall have the authority
to fix and determine, subject to the provisions hereof, the rights, restrictions
and preferences of the shares of any series so established.
4.3.1 SERIES A PREFERRED STOCK, SERIES B PREFERRED STOCK, SERIES C
STOCK AND SERIES D PREFERRED STOCK
One series of Preferred Stock shall be designated "Series A Preferred
Stock," and shall consist of 4,000,000 shares. A second series of Preferred
Stock shall be designated "Series B Preferred Stock," and shall consist of
7,500,000 shares. A third series of Preferred Stock shall be designated "Series
C Preferred Stock," and shall consist of 9,277,156 shares. A fourth series of
Preferred Stock shall be designated "Series D Preferred Stock," and shall
consist of 4,324,325 shares. The rights, preferences, restrictions and other
matters relating to the Series A Preferred Stock (the "Series A Stock"), the
Series B Preferred Stock (the "Series B Stock"), the Series C Preferred Stock
(the "Series C Stock") and the Series D Preferred Stock (the "Series D Stock")
are as follows:
(a) Dividends. The holders of shares of the Series A Stock,
the Series B Stock, the Series C Stock and the Series D Stock shall be entitled
to receive dividends, out of any assets of the corporation legally available
therefor, prior and in preference to any declaration or payment of any dividend
(payable other than in Common Stock of the corporation) on the Common Stock of
the corporation during
-2-
<PAGE> 3
any fiscal year, at the rate of 10 percent of the applicable Original Issue
Price (as defined below) for such series of Preferred Stock per annum per share
of such series of Preferred Stock then outstanding, payable when, as and if
declared by the Board of Directors. After payment of such dividends to the
holders of the Series A Stock, the Series B Stock, the Series C Stock and the
Series D Stock (and of any other class or series of Preferred Stock having
preferential rights as to dividends) in any fiscal year, the corporation may in
the same fiscal year declare or pay a dividend on Common Stock, provided the
corporation shall simultaneously declare and pay a dividend on each outstanding
share of Series A Stock, Series B Stock, Series C Stock and the Series D Stock
that is equal to the dividend to be declared or paid on each share of Common
Stock times the number of shares of Common Stock into which each such share of
Series A Stock, Series B Stock, Series C Stock or Series D Stock is then
convertible. The right to dividends on the Series A Stock, the Series B Stock,
the Series C Stock and Series D Stock shall not be cumulative, and no right
shall accrue to the holders of the Series A Stock, the Series B Stock, the
Series C Stock or the Series D Stock in the event the corporation shall,
irrespective of its earnings, fail to declare or pay such dividends, nor shall
any undeclared or unpaid dividend bear or accrue interest.
(b) Liquidation. Upon the voluntary or involuntary
dissolution, liquidation or winding up of the corporation, the assets of the
corporation available for distribution to its shareholders shall be distributed
in the following order and amounts:
(i) The holders of shares of Series B Stock
shall be entitled to receive $2.21 (appropriately adjusted for any stock
dividend, split, combination or similar reorganization of the Series B Stock
(the "Series B Original Issue Price")) for each outstanding share of Series B
Stock held by them, and, in addition, an amount equal to any dividends declared
but not paid on each such share. The holders of shares of Series C Stock shall
be entitled to receive $6.61 (appropriately adjusted for any stock dividend,
split, combination or similar reorganization of the Series C Stock (the "Series
C Original Issue Price")) for each outstanding share of Series C Stock held by
them, and, in addition, an amount equal to any dividends declared but not paid
on each such share. The holders of shares of Series D Stock shall be entitled to
receive $7.50 (appropriately adjusted for any stock dividend, split, combination
or similar reorganization of the Series D Stock (the "Series D Original Issue
Price")) for each outstanding share of Series D Stock held by them, and, in
addition, an amount equal to any dividends declared but not paid on each such
share. If such assets available for distribution shall be insufficient to permit
the payment to the holders of Series B Stock, Series C Stock and Series D Stock
of the preferential amounts to which they may be entitled under this Section
4.3.1(b)(i), then the entire assets of the
-3-
<PAGE> 4
corporation legally available for distribution shall be distributed ratably
among the holders of shares of Series B Stock, Series C Stock and Series D Stock
based upon the number of shares of Common Stock issuable upon the exercise of
shares of Series B Stock, Series C Stock and Series D Stock held by each of such
holders, up to the point where the value of assets distributed to the holders of
shares of the Series B Stock with respect to each share of Series B Stock held
by them equals the Series B Original Issue Price, with any remaining assets
distributed ratably among the holders of shares of Series C Stock and Series D
Stock based upon the number of shares of Series C Stock and Series D Stock held
by each of such holders, up to the point where the aggregate value of assets
distributed to the holders of shares of the Series C Stock under this Section
4.3.1(b)(i) with respect to each share of Series C Stock held by them equals the
Series C Original Issue Price, with any remaining assets distributed ratably
among the holders of shares of Series D Stock based upon the number of shares of
Series D Stock held by each such holder.
(ii) After setting apart or paying in full the
preferential amounts due the holders of the Series B Stock, the Series C Stock
and the Series D Stock as provided in Section 4.3.1(b)(i), if assets available
for distribution remain, the holders of shares of Series A Stock shall be
entitled to receive $1.00 (appropriately adjusted for any stock dividend, split,
combination or similar recapitalization of such Series A Stock (the "Series A
Original Issue Price" and, together with the Series B Original Issue Price, the
Series C Original Issuance Price and the Series D Original Issue Price,
collectively, the "Original Issue Prices")) for each outstanding share of Series
A Stock held by them, and, in addition, an amount equal to any dividends
declared but not paid on each such share. If such assets available for
distribution shall be insufficient to permit the payment to the holders of the
Series A Stock of the preferential amounts to which they may be entitled under
this Section 4.3.1(b)(ii), then the entire assets of the corporation legally
available for distribution shall be distributed ratably among the holders of
shares of Series A Stock based upon the number of shares of such stock held by
each of such holders.
(iii) After setting apart or paying in full the
preferential amounts due the holders of the Series A Stock, the Series B Stock,
the Series C Stock and the Series D Stock as provided in Sections 4.3.1(b)(i)
and (ii), if assets available for distribution remain, such remaining assets
shall be distributed ratably among the holders of Series A Stock, Series B
Stock, Series C Stock, Series D Stock and Common Stock as though all the shares
of Series A Stock, Series B Stock, Series C Stock and the Series D Stock were
converted to shares of Common Stock, up to the point where the aggregate value
of assets distributed to the holders of the Series A Stock (including the
amounts distributed pursuant to Section 4.3.1(b)(ii)) equals three
-4-
<PAGE> 5
times the Series A Original Issue Price for each outstanding share of Series A
Stock held by them. If such assets available for distribution under this Section
4.3.1(b)(iii) shall be insufficient to permit the payment to the holders of the
Series A Stock, the Series B Stock, the Series C Stock, the Series D Stock and
the Common Stock of the full preferential amounts to which they may be entitled
under this Section 4.3.1(b)(iii), then the entire remaining assets of the
corporation legally available for distribution shall be distributed ratably
among the holders of shares of Series A Stock, the Series B Stock, the Series C
Stock, the Series D Stock and Common Stock based upon the number of shares of
Common Stock (A) held by each of such holders or (B) issuable upon the exercise
of shares of Series A Stock, Series B Stock, Series C Stock or Series D Stock
held by each of such holders.
(iv) After setting apart or paying in full the
preferential amounts due the holders of the Series A Stock, the Series B Stock,
the Series C Stock, the Series D Stock and the Common Stock as provided in
Sections 4.3.1(b)(i), (ii) and (iii), if assets available for distribution
remain, such remaining assets shall be distributed ratably among the holders of
Series B Stock, Series C Stock, Series D Stock and Common Stock as though all
the shares of Series B Stock, Series C Stock and Series D Stock were converted
to shares of Common Stock, up to the point where the aggregate value of assets
distributed to the holders of the Series B Stock (including the amounts
distributed pursuant to Sections 4.3.1(b)(i) and (iii)) equals three times the
Series B Original Issue Price for each outstanding share of Series B Stock held
by them. If such assets available for distribution under this Section
4.3.1(b)(iv) shall be insufficient to permit the payment to the holders of the
Series B Stock, the Series C Stock, the Series D Stock and the Common Stock of
the full preferential amounts to which they may be entitled under this Section
4.3.1(b)(iv), then the entire remaining assets of the corporation legally
available for distribution shall be distributed ratably among the holders of
shares of Series B Stock, Series C Stock, Series D Stock and Common Stock based
upon the number of shares of Common Stock (A) held by each of such holders or
(B) issuable upon the exercise of shares of Series B Stock, Series C Stock or
Series D Stock held by each of such holders.
(v) After setting apart or paying in full the
preferential amounts due the holders of the Series A Stock, the Series B Stock,
the Series C Stock, the Series D Stock and the Common Stock as provided in
Sections 4.3.1(b)(i) through (iv), if assets available for distribution remain,
such remaining assets shall be distributed ratably among the holders of Series C
Stock, Series D Stock and Common Stock as though all the shares of Series C
Stock and Series D Stock were converted to shares of Common Stock, up to the
point where the aggregate value of assets distributed to the holders of the
Series C Stock (including the amounts distributed
-5-
<PAGE> 6
pursuant to Sections 4.3.1(b)(i), (iii) and (iv)) equals three times the Series
C Original Issue Price for each outstanding share of Series C Stock held by
them. If such assets available for distribution under this Section 4.3.1(b)(v)
shall be insufficient to permit the payment to the holders of the Series C Stock
and the Common Stock of the full preferential amounts to which they may be
entitled under this Section 4.3.1(b)(v), then the entire remaining assets of the
corporation legally available for distribution shall be distributed ratably
among the holders of shares of Series C Stock, Series D Stock and Common Stock
based upon the number of shares of Common Stock (A) held by each of such holders
or (B) issuable upon the exercise of shares of Series C Stock or Series D Stock
held by each of such holders.
(vi) After setting apart or paying in full the
preferential amounts due the holders of the Series A Stock, the Series B Stock,
the Series C Stock and the Common Stock as provided in Sections 4.3.1(b)(i)
through (v), if assets available for distribution remain, such remaining assets
shall be distributed ratably among the holders of Series D Stock and Common
Stock as though all the shares of Series D Stock were converted to shares of
Common Stock, up to the point where the aggregate value of assets distributed to
the holders of the Series D Stock (including the amounts distributed pursuant to
Sections 4.3.1(b)(i), (iii), (iv) and (v)) equals three times the Series D
Original Issue Price for each outstanding share of Series D Stock held by them.
If such assets available for distribution under this Section 4.3.1(b)(vi) shall
be insufficient to permit the payment to the holders of the Series D Stock and
the Common Stock of the full preferential amounts to which they may be entitled
under this Section 4.3.1(b)(vi), then the entire remaining assets of the
corporation legally available for distribution shall be distributed ratably
among the holders of shares of Series D Stock and Common Stock based upon the
number of shares of Common Stock (A) held by each of such holders or (B)
issuable upon the exercise of shares of Series D Stock held by each of such
holders.
(vii) After setting apart or paying in full the
preferential amounts due the holders of the Series A Stock, the Series B Stock,
the Series C Stock, the Series D Stock and the Common Stock as provided in
Sections 4.3.1(b)(i) through (vi), if assets available for distribution remain,
such remaining assets shall be distributed ratably among the holders of the
Common Stock.
(c) Merger, Reorganization or Other Transaction. A
consolidation or merger of the corporation with or into another corporation or
other entity or person (excluding any merger effected exclusively for the
purpose of changing the domicile of the corporation), or any other corporate
reorganization or other transaction or series of related transactions by the
corporation, in any such case, in which the shareholders
-6-
<PAGE> 7
of the corporation immediately prior to such transaction or series of related
transactions shall own less than 50% of the voting securities of the surviving
corporation immediately after such transaction or series of related
transactions, or a sale, conveyance or disposition of all or substantially all
of the assets of the corporation (including for purposes of this section,
intellectual property rights which, in the aggregate, constitute substantially
all of the corporation's material assets), shall be deemed to be a liquidation,
dissolution or winding up within the meaning of Section 4.3.1(b).
(d) Distributions to Shareholders. The board of directors'
right to authorize and make distributions to its shareholders is subject to the
restrictions set forth in ORS 60.181 and such other applicable legal
restrictions as are or may hereafter become effective.
(e) Distributions Other than Cash. Whenever a distribution
provided for in Section 4.3.1(b) shall be payable in property other than cash,
the value of such distribution shall be the fair market value of such property,
as determined in good faith by the Board of Directors of the corporation.
4.3.2 VOTING POWER
(a) General Voting Rights. Except as otherwise provided
herein or as required by law, each holder of Series A Stock, Series B Stock,
Series C Stock and Series D Stock shall be entitled to vote on all matters and
shall be entitled to that number of votes equal to the number of shares of
Common Stock into which such holder's shares of Series A Stock, Series B Stock,
Series C Stock or Series D Stock could be converted under Section 4.3.3 (with
any fractional share determined on an aggregate conversion basis being rounded
to the nearest whole share) at the record date for the determination of
shareholders entitled to vote on such matter or, if no such record date is
established, at the date on which notice of the meeting of shareholders at which
the vote is to be taken is mailed, or the date any written consent of
shareholders is solicited if the vote is not to be taken at a meeting, and, with
respect to such votes, shall have full voting rights and powers equal to the
voting rights and powers of the holders of Common Stock. Except as otherwise
provided herein or as otherwise expressly provided by the Oregon Business
Corporation Act, the holders of shares of Series A Stock, Series B Stock, Series
C Stock, Series D Stock and Common Stock shall vote together as a single class
on all matters.
(b) Series A Vote. So long as any shares of the Series A
Stock are outstanding, the corporation shall not, without first obtaining the
approval of the
-7-
<PAGE> 8
holders of at least 50 percent of the shares of Series A Stock then outstanding,
voting together as a separate class:
(i) authorize or issue shares of any new class
or series of capital stock on a parity with or having any preference or priority
over any shares of Series A Stock then outstanding, or take any action that
reclassifies any outstanding shares of the capital stock of the corporation into
shares having rights, preferences or privileges as to dividends or as to assets
upon liquidation or dissolution senior to or on a parity with the rights,
preferences and privileges of shares of Series A Stock;
(ii) issue additional shares of Series A Stock;
(iii) materially adversely alter the rights,
preferences and privileges of the Series A Stock; or
(iv) change the percentage of the shares of Series A
Stock required to approve the foregoing actions
set forth in clauses (i), (ii) and (iii) above.
(c) Series B Vote. So long as any shares of the Series B
Stock are outstanding, the corporation shall not, without first obtaining the
approval of the holders of at least 50 percent of the shares of Series B Stock
then outstanding, voting together as a separate class:
(i) authorize or issue shares of any new class or
series of capital stock having any preference or priority over any shares of
Series B Stock then outstanding, or take any action that reclassifies any
outstanding shares of the capital stock of the corporation into shares having
rights, preferences or privileges as to dividends or as to assets upon
liquidation or dissolution senior to the rights, preferences and privileges of
shares of Series B Stock;
(ii) issue additional shares of Series B Stock;
(iii) materially adversely alter the rights,
preferences and privileges of the Series B Stock; or
(iv) change the percentage of the shares of Series B
Stock required to approve the foregoing actions
set forth in clauses (i), (ii) and (iii) above.
(d) Series C Vote. So long as any shares of the Series C
Stock are outstanding, the corporation shall not, without first obtaining the
approval of the holders of at least 50 percent of the shares of Series C Stock
then outstanding, voting together as a separate class:
-8-
<PAGE> 9
(i) authorize or issue shares of any new class
or series of capital stock having any preference or priority over any shares of
Series C Stock then outstanding, or take any action that reclassifies any
outstanding shares of the capital stock of the corporation into shares having
rights, preferences or privileges as to dividends or as to assets upon
liquidation or dissolution senior to or pari passu with the rights, preferences
and privileges of shares of Series C Stock;
(ii) issue additional shares of Series A Stock,
Series B Stock or Series C Stock other than up to 200,000 shares of Series C
Stock (issuable upon the exercise of warrants outstanding on or after the Series
C Original Issue Date with an exercise price of at least $6.61 per share (such
number of shares and exercise price to be adjusted appropriately for stock
dividends, splits, combinations and similar transactions);
(iii) materially adversely alter the rights,
preferences and privileges of the Series C Stock; or
(iv) change the percentage of the shares of Series C
Stock required to approve the foregoing actions set forth in clauses (i), (ii)
and (iii) above.
(e) Series D Vote. So long as any shares of the Series D
Stock are outstanding, the corporation shall not, without first obtaining the
approval of the holders of at least 50 percent of the shares of Series D Stock
then outstanding, voting together as a separate class:
(i) authorize or issue shares of any new class or
series of capital stock having any preference or priority over any shares of
Series D Stock then outstanding, or take any action that reclassifies any
outstanding shares of the capital stock of the corporation into shares having
rights, preferences or privileges as to dividends or as to assets upon
liquidation or dissolution senior to or pari passu with the rights, preferences
and privileges of shares of Series D Stock;
(ii) issue additional shares of Series A Stock,
Series B Stock, Series C Stock or Series D Stock, other than up to 200,000
shares of Series C Stock (issuable upon the exercise of warrants outstanding on
or after the Series C Original Issue Date with an exercise price of at least
$6.61 per share (such number of shares and exercise price to be adjusted
appropriately for stock dividends, splits, combinations and similar
transactions);
(iii) materially adversely alter the rights,
preferences and privileges of the Series D Stock; or
-9-
<PAGE> 10
(iv) change the percentage of the shares of Series D
Stock required to approve the foregoing actions set forth in clauses (i), (ii)
and (iii) above.
(f) Series A, B, C and D Vote. So long as any shares of
Series A Stock, Series B Stock, Series C Stock or Series D Stock are
outstanding, the corporation shall not, without first obtaining the approval of
the holders of at least 60 percent of the aggregate number of shares of Series A
Stock, Series B Stock, Series C Stock and Series D Stock then outstanding,
voting together as a separate class:
(i) declare or pay any dividends or otherwise make
a distribution in respect of any shares of the Common Stock;
(ii) redeem, purchase or otherwise acquire (or pay
into or set aside for a sinking fund for such purpose) any equity securities of
the corporation; provided, however, that this restriction shall not apply to (A)
repurchases and redemptions called for by these Articles of Incorporation, (B)
the repurchase of shares of Common Stock (1) from employees, officers,
directors, or any other person performing services for the corporation pursuant
to agreements under which the corporation has the option to repurchase such
shares upon or in connection with termination of employment or through the
exercise of any right of first refusal, or (2) pursuant to the Third Amended and
Restated Shareholders' Agreement, dated on or about the date shares of Series D
Stock are first issued by the corporation (the "Series D Original Issue Date"),
among the corporation and shareholders thereof or (C) repurchases approved by
all directors of the corporation attending and voting at a meeting of the Board
of Directors at which a quorum is present (or by all directors of the
corporation if the action is taken by written consent in lieu of a meeting) (the
"Required Directors");
(iii) increase the authorized number of directors of
the corporation in excess of seven;
(iv) effect a consolidation or merger of the
corporation with or into another corporation or other entity or person
(excluding any merger effected exclusively for the purpose of changing the
domicile of the corporation), or any other corporate reorganization or other
transaction or series of related transactions by the corporation, in any such
case, in which the shareholders of the corporation immediately prior to such
transaction or series of related transactions shall own less than 50% of the
voting securities of the surviving corporation immediately after such
transaction or series of related transactions, or a sale, conveyance or
disposition of all or substantially all of the assets of the corporation
(including for purposes of this
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section, intellectual property rights which, in the aggregate, constitute
substantially all of the corporation's material assets);
(v) acquire the assets, business or control of any
other corporation or business entity, through merger, consolidation or
otherwise, or make any other form of investment in any other corporation or
business entity where the cost to the corporation would exceed $100,000, whether
effected in a single transaction or in a series of related transactions, other
than assets acquired in the ordinary course of business; or
(vi) change the percentage of the Series A Stock,
Series B Stock, Series C Stock and Series D Stock required to approve the
foregoing actions set forth in clauses (i) through (v) above.
4.3.3 CONVERSION RIGHTS
The holders of the Series A Stock, the Series B Stock, the Series C
Stock and the Series D Stock shall have the following rights with respect to the
conversion of Series A Stock, Series B Stock, Series C Stock and Series D Stock
into shares of Common Stock:
(a) General.
(i) Voluntary Conversion. Shares of the Series A
Stock may, at the option of the holder, be converted at any time into such
number of fully paid and nonassessable shares of Common Stock as are equal to
the product obtained by multiplying the Series A Conversion Rate (determined
under Section 4.3.3(b)) by the number of shares of Series A Stock being
converted. Shares of Series B Stock may, at the option of the holder, be
converted at any time prior to the Redemption Date, if any, specified in any
Redemption Notice (as defined in Section 4.3.4) with respect to such shares of
Series B Stock, into such number of fully paid and nonassessable shares of
Common Stock as are equal to the product obtained by multiplying the Series B
Conversion Rate (determined under Section 4.3.3(b)) by the number of shares of
Series B Stock being converted. Shares of Series C Stock may, at the option of
the holder, be converted at any time prior to the Redemption Date, if any,
specified in any Redemption Notice with respect to such shares of Series C
Stock, into such number of fully paid and nonassessable shares of Common Stock
as are equal to the product obtained by multiplying the Series C Conversion Rate
(determined under Section 4.3.3(b)) by the number of shares of Series C Stock
being converted. Shares of Series D Stock may, at the option of the holder, be
converted at any time prior to the Redemption Date, if any, specified in any
Redemption Notice with respect to such
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shares of Series D Stock, into such number of fully paid and nonassessable
shares of Common Stock as are equal to the product obtained by multiplying the
Series D Conversion Rate (determined under Section 4.3.3(b)) by the number of
shares of Series D Stock being converted.
(ii) Mandatory Conversion. Each share of Series A
Stock, Series B Stock, Series C Stock and Series D Stock shall be converted
automatically (without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
corporation or its transfer agent for the Common Stock), into the number of
shares of Common Stock into which such Series A Stock, Series B Stock, Series C
Stock or Series D Stock is convertible pursuant to Section 4.3.3(a)(i), upon the
earlier of (A) the closing of a firmly underwritten, public offering by the
corporation of shares of Common Stock, registered under the Securities Act of
1933, as amended (the "Securities Act"), on Form S-1 (or its successor form), in
which the aggregate offering proceeds paid to the corporation are in excess of
$15,000,000 (before deduction of underwriters' discounts and commissions and
expenses of the offering) and, with respect to the Series A Stock and the Series
B Stock, the offering price per share is at least $6.63 (appropriately adjusted
for any stock dividend, split or combination), with respect to the Series C
Stock, the offering price per share is at least twice the Series C Original
Issuance Price (appropriately adjusted for any stock dividend, split or
combination) or, with respect to the Series D stock, the offering price per
share is at least twice the Series C Original Issue Price (appropriately
adjusted for any such dividend, split or combination), or (B) with respect to
the Series A Stock and the Series B Stock, the conversion or approval of the
conversion by the holders of a majority of the then outstanding shares of Series
A Stock and Series B Stock (measured on a combined basis as though the Series A
Stock and Series B Stock were one series), with respect to the Series C Stock,
the conversion or approval of the conversion by the holders of a majority of the
then outstanding shares of Series C Stock or, with respect to the Series D
Stock, the conversion or approval of the conversion by the holders of a majority
of the then outstanding shares of Series D Stock. In addition, if not earlier
converted, each share of Series A Stock, Series B Stock, Series C Stock or
Series D Stock shall be converted automatically (without any further action by
the holders of such shares and whether or not the certificates representing such
shares are surrendered to the corporation or its transfer agent for the Common
Stock), into the number of shares of Common Stock into which such Series A
Stock, Series B Stock, Series C Stock or Series D Stock is convertible pursuant
to Section 4.3.3(a)(i), immediately prior to the determination of any
distribution resulting from or in respect of any voluntary or involuntary
dissolution, liquidation or winding up of the corporation (within the meaning of
Section 4.3.1(b) hereof) if conversion would entitle the holders of shares of
such
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applicable series of Preferred Stock to a greater distribution than otherwise
would be made on account of such series of Preferred Stock under Section
4.3.1(b).
(b) Conversion Rate. The conversion rate for Series A Stock
in effect at any time (the "Series A Conversion Rate") shall equal $1.00 divided
by the Series A Conversion Price, calculated as provided in Section 4.3.3(c).
The conversion rate for Series B Stock in effect at any time (the "Series B
Conversion Rate") shall equal $2.21 divided by the Series B Conversion Price,
calculated as provided in Section 4.3.3(c). The conversion rate for Series C
Stock in effect at any time (the "Series C Conversion Rate") shall equal $6.61
divided by the Series C Conversion Price, calculated as provided in Section
4.3.3(c). The conversion rate for Series D Stock in effect at any time (the
"Series D Conversion Rate") shall equal $7.50 divided by the Series D Conversion
Price, calculated as provided in Section 4.3.3(c).
(c) Conversion Price. The conversion price for the Series A
Stock in effect from time to time, except as adjusted in accordance with Section
4.3.3(d), shall be $1.00 (the "Series A Conversion Price"). The conversion price
for the Series B Stock in effect from time to time, except as adjusted in
accordance with Section 4.3.3(d), shall be $2.21 (the "Series B Conversion
Price"). The conversion price for the Series C Stock in effect from time to
time, except as adjusted in accordance with Section 4.3.3(d), shall be $6.61
(the "Series C Conversion Price"). The conversion price for the Series D Stock
in effect from time to time, except as adjusted in accordance with Section
4.3.3(d), shall be $7.50 (the "Series D Conversion Price" and, together with the
Series A Conversion Price, the Series B Conversion Price and the Series C
Conversion Price, collectively, the "Conversion Prices").
(d) Adjustments to Applicable Conversion Price.
(i) Extraordinary Common Stock Event. Upon the
happening of an Extraordinary Common Stock Event (as defined below) after the
date of the initial issuance of any shares of Series A Stock, the Conversion
Prices shall, simultaneously with the happening of such Extraordinary Common
Stock Event, be adjusted by multiplying the then effective Series A Conversion
Price, Series B Conversion Price, Series C Conversion Price or Series D
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such Extraordinary
Common Stock Event and the denominator of which shall be the number of shares of
Common Stock outstanding immediately after such Extraordinary Common Stock Event
(with the number of shares issuable with respect to Common Stock Equivalents (as
defined below) determined in the manner provided for deemed issuances in Section
4.3.3(d)(ii)(E)), and the product so obtained shall thereafter be the Series A
Conversion Price, the
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Series B Conversion Price, Series C Conversion Price or Series D Conversion
Price, as the case may be. The Series A Conversion Price, the Series B
Conversion Price, the Series C Conversion Price and the Series D Conversion
Price, as so adjusted, shall be readjusted in the same manner upon the happening
of any successive Extraordinary Common Stock Event or Events.
"Extraordinary Common Stock Event" shall mean (x) the issuance of
additional shares of Common Stock, as a dividend or other distribution on
outstanding Common Stock of the corporation, or other securities or rights
convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock ("Common Stock Equivalents")
without the payment of any consideration, (y) a split or subdivision of
outstanding shares of Common Stock into a greater number of shares of Common
Stock, or (z) a combination of outstanding shares of Common Stock into a smaller
number of shares of Common Stock.
(ii) Sale of Shares Below Series A Conversion
Price, Series B Conversion Price, Series C
Conversion Price or Series D Conversion
Price.
(A) If the corporation shall issue any
Additional Stock (as defined below) without consideration or for a consideration
per share less than the Series A Conversion Price, the Series B Conversion
Price, the Series C Conversion Price and/or the Series D Conversion Price in
effect immediately prior to the issuance of such Additional Stock, the Series A
Conversion Price, the Series B Conversion Price, the Series C Conversion Price
and/or the Series D Conversion Price, as applicable, in effect immediately prior
to issuance of such Additional Stock (except as otherwise provided in this
Section 4.3.3(d)(ii)) shall be adjusted down to a price equal to the quotient
obtained by dividing the total computed under clause (x) below by the total
computed under clause (y) below, as follows:
(x) an amount equal to the sum of (1) the result
obtained by multiplying the number of shares of Common Stock deemed
outstanding immediately prior to such issuance (which shall include the
actual number of shares of Common Stock outstanding plus all shares of
Common Stock issuable upon the conversion or exercise of all
outstanding convertible securities, warrants and options) by the
Conversion Price for such series of Preferred Stock then in effect, and
(2) the aggregate consideration, if any, received by the corporation
upon the issuance of such Additional Stock;
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<PAGE> 15
(y) the number of shares of Common Stock of the
corporation outstanding immediately after such issuance (including the
shares deemed outstanding as provided in clause (x) above).
(B) No adjustment of the Series A Conversion
Price, the Series B Conversion Price, the Series C Conversion Price and/or the
Series D Conversion Price shall be made in an amount less than one cent per
share, provided, however, that any adjustments which are not required to be made
by reason of this sentence shall be carried forward and shall be taken into
account in any subsequent adjustment made to the Series A Conversion Price, the
Series B Conversion Price, the Series C Conversion Price and/or the Series D
Conversion Price, as applicable. Except to the limited extent provided for in
Sections 4.3.3(d)(ii)(E)(3) and (4), no adjustment of the Series A Conversion
Price, the Series B Conversion Price, the Series C Conversion Price or the
Series D Conversion Price pursuant to this Subsection 4.3.3(d)(ii) shall have
the effect of increasing the Conversion Price for such series of Preferred Stock
above the Conversion Price for such series of Preferred Stock in effect
immediately prior to such adjustment.
(C) In the case of the issuance of Common
Stock for cash, the consideration shall be deemed to be the amount of cash paid
therefor before deducting any discounts, commissions or other expenses allowed,
paid or incurred by the corporation for any underwriting or otherwise in
connection with the issuance and sale thereof.
(D) In the case of the issuance of Common
Stock for a consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the fair value thereof as determined in
good faith by the Board of Directors of the corporation, irrespective of any
accounting treatment.
(E) In the case of the issuance of options
or warrants to purchase or rights to subscribe for Common Stock, securities by
their terms convertible into or exchangeable for Common Stock, or options or
warrants to purchase or rights to subscribe for such convertible or exchangeable
securities (which options, warrants, rights, convertible or exchangeable
securities are not excluded from the definition of Additional Stock by Section
4.3.3(d)(iii)(B), (C), (E) or (F)), the following provisions shall apply:
(1) the aggregate maximum number of shares
of Common Stock deliverable upon exercise of such options or warrants
to purchase or rights to subscribe for Common Stock shall be deemed to
have been issued at the time such options, warrants or rights were
issued for a
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consideration equal to the consideration (determined in the manner
provided in Sections 4.3.3(d)(ii)(C) and (D) above), if any,
received by the corporation upon the issuance of such options, warrants
or rights plus the minimum purchase price provided in such options,
warrants or rights for the Common Stock covered thereby, but no further
adjustment to the Series A Conversion Price, the Series B Conversion
Price, the Series C Conversion Price and/or the Series D Conversion
Price shall be made for the actual issuance of Common Stock upon the
exercise of such options, warrants or rights in accordance with their
terms;
(2) the aggregate maximum number of shares
of Common Stock deliverable upon conversion of or in exchange for any
such convertible or exchangeable securities or upon the exercise of
options or warrants to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such
securities were issued or such options, warrants or rights were issued
for a consideration equal to the consideration received, if any, by the
corporation for any such securities and related options, warrants or
rights, plus the minimum additional consideration, if any, to be
received by the corporation upon the conversion or exchange of such
securities or the exercise of any related options, warrants or rights
and the subsequent conversion or exchange of the securities issued upon
the exercise of such options, warrants or rights (the consideration in
each case to be determined in the manner provided in Sections
4.3.3(d)(ii)(C) and (D) above), but no further adjustment to the Series
A Conversion Price, the Series B Conversion Price, the Series C
Conversion Price and/or the Series D Conversion Price shall be made for
the actual issuance of Common Stock upon the conversion or exchange of
such securities or the exercise of any such related options, warrants
or rights or such subsequent conversion or exchange in accordance with
their terms;
(3) if such options, warrants, rights or
convertible or exchangeable securities by their terms provide, with the
passage of time or otherwise, for any change in the consideration
payable to the corporation or in the number of shares of Common Stock
issuable upon the exercise, conversion or exchange thereof, including,
without limitation, a change resulting from the anti-dilution
provisions thereof, the Series A Conversion Price, the Series B
Conversion Price, the Series C Conversion Price and/or the Series D
Conversion Price computed upon the original issue thereof, and any
subsequent adjustments based thereon, shall, upon such change becoming
effective, be
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recomputed to reflect such change, but no further adjustment to the
Conversion Price for such series of Preferred Stock shall be made for
the actual issuance of Common Stock upon the exercise of any such
options, warrants or rights or the conversion or exchange of such
securities in accordance with their terms; and
(4) upon the expiration of any such options,
warrants or rights, the termination of any such rights to convert or
exchange or the expiration of any options, warrants or rights related
to such convertible or exchangeable securities, the Series A Conversion
Price, the Series B Conversion Price, the Series C Conversion Price
and/or the Series D Conversion Price shall forthwith be readjusted to
such Conversion Price for such series of Preferred Stock as would have
been obtained had the adjustment which was made upon the issuance of
such options, warrants, rights or securities or options, warrants or
rights related to such securities been made upon the basis of the
issuance of only the number of shares of Common Stock (and convertible
or exchangeable securities which remain in effect) actually issued upon
the exercise of such options, warrants or rights, upon the conversion
or exchange of such securities or upon the exercise of the options,
warrants or rights related to such securities.
(iii) "Additional Stock" shall mean any shares of
Common Stock or securities convertible into or exchangeable or exercisable for
shares of Common Stock issued (or deemed to have been issued pursuant to Section
4.3.3(d)(ii)(E) above) by the corporation after the Series D Original Issue Date
other than:
(A) Common Stock issued in connection
with an Extraordinary Common Stock Event pursuant to Section
4.3.3(d)(i);
(B) (I) 3,478,568 shares of Common
Stock (adjusted appropriately for stock dividends, splits, combinations
and similar transactions) issued or issuable after the Series D
Original Issue Date to employees, consultants or directors of the
corporation pursuant to the corporation's 1998 Stock Option Plan, as
amended from time to time, to the extent such issuances are approved by
the Board of Directors of the corporation, and (II) shares of Common
Stock issuable or issued to employees, consultants or directors of the
corporation directly or pursuant to a stock option plan (other than the
1998 Stock Option Plan), restricted stock plan or agreement approved by
the Required Directors;
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(C) (I) 2,171,128 shares of Common Stock
and (II) 200,000 shares of Series C Stock (in each case adjusted
appropriately for stock dividends, splits, combinations and similar
transactions) issued or issuable upon exercise of warrants outstanding
on or after the Series D Original Issue Date;
(D) Common Stock issued or issuable
upon conversion of Series A Stock, Series B Stock, Series C Stock or
Series D Stock;
(E) Capital stock, or options or
warrants to purchase capital stock, issued to financial institutions or
lessors in connection with commercial credit arrangements, equipment
financings or similar transactions which have been approved by the
Required Directors;
(F) Capital stock, or options or
warrants to purchase capital stock, issued in connection with (I) bona
fide acquisitions of businesses, products or technology or (II)
strategic transactions involving the corporation and other entities
(including joint ventures, marketing or distributions arrangements, and
technology transfer or development arrangements other than those
primarily for capital raising purposes), the terms of which have been
approved by the Required Directors; and
(G) Warrants issued to lenders in
connection with bridge loan financings which have been approved by the
Required Directors, and the shares of Common Stock issued or issuable
upon exercise of such warrants.
(e) Capital Reorganization or Reclassification. If the Common
Stock issuable upon the conversion of the Series A Stock, the Series B Stock,
the Series C Stock and the Series D Stock shall be changed into the same or
different number of shares of any class or classes of stock of the corporation,
whether by capital reorganization, reclassification or otherwise (other than an
Extraordinary Common Stock Event provided for in Section 4.3.3(d)(i)), then and
in each such event the holders of each share of Series A Stock, Series B Stock,
Series C Stock and Series D Stock shall have the right thereafter to convert
such shares into the kind and amount of shares of stock and other securities and
property receivable upon such reorganization, reclassification or other change
by holders of the number of shares of Common Stock into which such share of
Series A Stock, Series B Stock, Series C Stock or Series D Stock, as the case
may be, might have been converted immediately prior to such reorganization,
reclassification or change, all subject to adjustment as provided herein.
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In any such case, appropriate adjustment shall be made in the application of the
provisions of this Section 4.3.3 with respect to the rights of the holders of
Series A Stock, Series B Stock, Series C Stock and Series D Stock after the
reorganization, recapitalization or change to the end that the provisions of
this Section 4.3.3 (including adjustment of the Conversion Price then in effect
for such series of Preferred Stock and the number of shares issuable upon
conversion of such series of Preferred Stock) shall be applicable after that
event as nearly equivalent as may be practicable.
(f) Other Distributions. In the event the corporation shall,
with respect to outstanding Common Stock of the corporation, declare a
distribution payable in securities of other persons, evidences of indebtedness
issued by the corporation or other persons, assets (excluding cash dividends) or
options or rights not referred to in Section 4.3.3(d)(i) or (ii), then in each
case for the purpose of this Section 4.3.3(f) the holders of the Series A Stock,
the Series B Stock, the Series C Stock and the Series D Stock shall be entitled
to a proportionate share of any such distribution as though they were the
holders of the number of shares of Common Stock of the corporation into which
their shares of Series A Stock, Series B Stock, Series C Stock or Series D
Stock, as the case may be, are convertible as of the record date fixed for the
determination of the holders of Common Stock of the corporation entitled to
receive such distribution.
(g) Certificate as to Adjustments; Notice by the Corporation.
In each case of an adjustment or readjustment of the Series A Conversion Rate,
the Series B Conversion Rate, the Series C Conversion Rate or the Series D
Conversion Rate, the corporation will furnish each holder of Series A Stock,
Series B Stock, Series C Stock or Series D Stock, as the case may be, with a
certificate, prepared by the Chief Financial Officer of the corporation, showing
such adjustment or readjustment and stating in detail the facts upon which such
adjustment or readjustment is based. The corporation shall, upon the written
request at any time of any holder of Series A Stock, Series B Stock, Series C
Stock or Series D Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustment and readjustment, (ii) the Series
A Conversion Price, the Series B Conversion Price, the Series C Conversion Price
or the Series D Conversion Price, as the case may be, at the time in effect, and
(iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of a share of
Series A Stock, Series B Stock, Series C Stock or Series D Stock, as the case
may be.
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(h) Exercise of Conversion Privilege. To exercise its
conversion privilege pursuant to Section 4.3.3(a)(i), each holder of Series A
Stock, Series B Stock, Series C Stock or Series D Stock shall surrender the
certificate or certificates representing the shares being converted to the
corporation at its principal office, and shall give written notice to the
corporation at that office that such holder elects to convert such shares. Such
notice shall also state the name or names (with address or addresses) in which
the certificate or certificates for shares of Common Stock issuable upon such
conversion shall be issued. The certificate or certificates for shares of Series
A Stock, Series B Stock, Series C Stock or Series D Stock surrendered for
conversion shall be accompanied by proper assignment thereof to the corporation
or in blank. The date when such written notice is received by the corporation,
together with the certificate or certificates representing the shares of Series
A Stock, Series B Stock, Series C Stock or Series D Stock, as the case may be,
being converted, shall be the "Conversion Date." As promptly as practicable
after the Conversion Date, the corporation shall issue and shall deliver to the
holder of the shares of Series A Stock, Series B Stock, Series C Stock or Series
D Stock being converted, or on its written order, such certificate or
certificates as it may request for the number of whole shares of Common Stock
issuable upon the conversion of such shares of Series A Stock, Series B Stock,
Series C Stock or Series D Stock in accordance with the provisions of this
Section 4.3.3, and cash in the amount of any declared and unpaid dividends on
such shares of Series A Stock, Series B Stock, Series C Stock or Series D Stock
up to and including the Conversion Date. Such conversion shall be deemed to have
been effected immediately prior to the close of business on the Conversion Date
and at such time the rights of the holder of the converted shares of Series A
Stock, Series B Stock, Series C Stock or Series D Stock, as the case may be,
shall cease with respect to such shares and the person or persons in whose name
or names any certificate or certificates for shares of Common Stock issuable
upon such conversion shall be deemed to have become the holder or holders of
record of the shares of Common Stock represented thereby. If the conversion is
in connection with an underwritten offering of securities registered pursuant to
the Securities Act, the conversion shall be conditioned upon the closing with
the underwriters of the sale of shares of Common Stock pursuant to such
offering, in which event the person(s) entitled to receive the Common Stock upon
conversion of the Series A Stock, Series B Stock, Series C Stock or Series D
Stock shall not be deemed to have converted such securities until immediately
prior to the closing of such sale of securities.
(i) No Fractional Shares. No fractional shares shall be issued
upon the conversion of Series A Stock, Series B Stock, Series C Stock or Series
D Stock, and the number of shares of Common Stock to be issued shall be rounded
to the nearest whole share, determined on the basis of the total number of
shares of Series A
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Stock, Series B Stock, Series C Stock and Series D Stock the holder is at the
time converting into Common Stock and the number of shares of Common Stock
issuable upon such aggregate conversion.
(j) Partial Conversion. In the event some, but not all, of the
shares of Series A Stock, Series B Stock, Series C Stock or Series D Stock
represented by a certificate or certificates surrendered by a holder are
converted, the corporation shall execute and deliver to or on the order of the
holder, at the expense of the corporation, a new certificate representing the
shares of Series A Stock, Series B Stock, Series C Stock or Series D Stock that
were not converted.
(k) Reservation of Common Stock. The corporation shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the shares
of the Series A Stock, Series B Stock, Series C Stock and Series D Stock, such
number of its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Series A Stock, Series B
Stock, Series C Stock and Series D Stock and, if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Series A Stock, Series B
Stock, Series C Stock and Series D Stock, the corporation shall take such
corporate action as may be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
(l) No Impairment. The corporation will not, by amendment of
its articles of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
Section 4.3.3 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Series A Stock, Series B Stock, Series C Stock and Series D Stock against
impairment.
SECTION 4.3.4 REDEMPTION
(a) Redemption of Series B Stock, Series C Stock and
Series D Stock.
(i) To the extent allowed by law, the corporation
shall redeem shares of Series B Stock, Series C Stock and Series D Stock upon
the request of the
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holders thereof, in accordance with paragraphs (ii) and (iii) of this Section
4.3.4(a) and with Section 4.3.4(b) hereof. The redemption price for each share
of Series B Stock shall be the Series B Original Issue Price plus dividends
declared, but not paid on such share (the "Series B Redemption Price"). The
redemption price for each share of Series C Stock shall be the Series C Original
Issue Price plus dividends declared, but not paid on such share (the "Series C
Redemption Price"). The redemption price for each share of Series D Stock shall
be the Series D Original Issue Price plus dividends declared, but not paid on
such share (the "Series D Redemption Price").
(ii) Within 15 days following the corporation's
receipt (at any time after March 1, 2004) from the holders of at least 50% of
the aggregate number of shares of Series B Stock, Series C Stock and Series D
Stock then outstanding of a written request that the corporation redeem all the
shares of Series B Stock, Series C Stock and Series D Stock held by such
holders, the corporation shall give written notice to each holder of record (at
the close of business on the business day immediately preceding the day on which
notice is given) of Series B Stock, Series C Stock and Series D Stock. Such
notice (a "Redemption Notice") shall state that a request to redeem the Series B
Stock, Series C Stock and Series D Stock has been received and that each holder
of Series B Stock, Series C Stock and Series D Stock, has the right under these
Articles of Incorporation to elect to have all of such holder's shares of Series
B Stock, Series C Stock and Series D Stock redeemed, such election to be made by
delivering to the corporation written notice of such election. The Redemption
Notice shall also specify the date (a "Redemption Date") on which such
redemption of Series B Stock, Series C Stock or Series D Stock is to be effected
(which date shall be no later than the 60th day after the date on which the
Redemption Notice is mailed), the Series B Redemption Price, the Series C
Redemption Price and the Series D Redemption Price, the dates and place at which
payments may be obtained, and the manner in which, and the place at which
certificates for the Series B Stock, Series C Stock and Series D Stock may be
surrendered. On the Redemption Date, the corporation shall redeem, in accordance
with this Section 4.3.4(a) and Section 4.3.4(b), all shares of Series B Stock,
Series C Stock and Series D Stock specified for redemption in the request for
redemption and all shares of Series B Stock, Series C Stock and Series D Stock,
elected to be redeemed in any unrevoked election received by the corporation on
or before the 10th day before the Redemption Date. Except as provided in Section
4.3.4(b)(i), on or after the Redemption Date, each holder of Series B Stock,
Series C Stock and Series D Stock to be redeemed shall surrender to the
corporation the certificate or certificates representing such shares, in the
manner and at the place designated in the Redemption Notice, and thereupon the
Series B Redemption Price, Series C Redemption Price or the Series D Redemption
Price, as the case may be, of such shares shall be payable in eight equal
quarterly
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installments (with interest payable as specified in Section 4.3.4(b)(iii)
hereof), the first installment to be paid on or prior to the Redemption Date,
with the second installment to be paid on the first day of the fourth month
following the month in which the Redemption Date occurs, and the remaining
installments to be paid on the first day of each third month thereafter until
the Redemption Price is paid in full. Such installments shall be evidenced by an
installment note made payable to the order of the person whose name appears on
such certificate or certificates as the owner thereof, and each surrendered
certificate shall be canceled.
(b) General.
(i) From and after the close of business on the
Redemption Date, unless there shall have been a default in payment of the
applicable Series B Redemption Price, Series C Redemption Price or Series D
Redemption Price, all rights of the holders of the shares to be redeemed on such
date as holders of such shares (except the right to receive the applicable
Redemption Price (with interest payable as specified in Section 4.3.4(b)(iii)
hereof) upon surrender of their certificate or certificates) shall cease with
respect to such shares and such shares shall not thereafter be transferred on
the books of the corporation or be deemed to be outstanding for any purpose
whatsoever.
(ii) On or prior to the Redemption Date, the
corporation may deposit the applicable Redemption Price
for all outstanding shares of Series B Stock, Series C Stock and Series D Stock
to be redeemed pursuant to Section 4.3.4(a) with a bank or trust company having
aggregate capital and surplus in excess of $50,000,000 as a trust fund for the
benefit of the respective holders of such shares. On or prior to the Redemption
Date, the corporation may deposit irrevocable instructions and authority to such
bank or trust company to pay, on and after the Redemption Date and in the
installments specified in Section 4.3.4(a)(ii), the applicable Redemption Price
(with interest payable as specified in Section 4.3.4(b)(iii) hereof), to the
holders of the shares which have been surrendered for redemption. Any monies
deposited by the corporation pursuant to this Section 4.3.4(b)(ii) for the
redemption of shares which are thereafter converted into shares of Common Stock
pursuant to Section 4.3.3 hereof no later than the close of business on the
Redemption Date shall be returned to the corporation forthwith upon such
conversion. The balance of any monies deposited by the corporation pursuant to
this Section 4.3.4(b)(ii) remaining unclaimed at the expiration of five years
following the Redemption Date shall thereafter be returned to the corporation,
provided that the shareholders to whom such monies would have been payable
hereunder shall be entitled, upon proof of their ownership of the stock to be
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redeemed and payment of any bond requested by the corporation, to receive such
monies but without interest from the Redemption Date.
(iii) Upon receipt from any holder of the
certificate or certificates representing the shares to be redeemed pursuant to
Section 4.3.4(a)(ii), the corporation shall deliver to such holder an
installment note made payable to the order of the person whose name appears on
such certificate or certificates as the owner thereof, which installment note
shall represent the unpaid balance of the Series B Redemption Price, Series C
Redemption Price or Series D Redemption Price, as the case may be. Amounts owing
under the note shall bear interest from the Redemption Date at the rate of 8%
per annum. Such installment note shall set forth the dates on which payments
shall be made and shall provide that: (i) the corporation shall have the
privilege of prepaying all or any part thereof at any time with interest to the
date of prepayment; (ii) a partial prepayment will cause a recalculation of the
equal installment payments for the balance of the term; (iii) a default in any
payment shall cause the remaining unpaid balance to become due and payable on
demand by the holder; (iv) the prevailing party shall be entitled to attorneys'
fees in any action to collect on the note, or any appeal therefrom.
4.3.5 REISSUANCE OF STOCK
No share or shares of Series A Stock, Series B Stock, Series C Stock or
Series D Stock converted, repurchased, redeemed or otherwise acquired by the
corporation shall be reissued, and all such shares shall be canceled, retired
and eliminated from the shares which the corporation shall be authorized to
issue. The corporation may from time to time take such appropriate corporate
action as may be necessary to reduce the authorized number of shares of the
Series A Stock, Series B Stock, Series C Stock and Series D Stock accordingly.
4.3.6 NOTICES OF RECORD DATE
In the event that the corporation shall propose at any time:
(a) to declare any dividend or distribution upon its Common
Stock, whether in cash, property, stock or other securities, whether or not a
regular cash dividend and whether or not out of earnings or earned surplus;
(b) to offer for subscription to the holders of any class of
series of its stock, any additional shares of stock of any class or series or
other rights;
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(c) to effect any reclassification or recapitalization of the
shares of its Common Stock outstanding involving a change in the Common Stock;
or
(d) to merge or consolidate with or into any other
corporation, to sell, lease or convey all or substantially all of its property
or business, or to liquidate, dissolve or wind up;
then, in connection with each such event, the corporation shall send to the
holders of the Series A Stock, Series B Stock, Series C Stock and Series D
Stock:
(i) at least 20 days' prior written notice of the
date on which a record shall be taken for such dividend, distribution or
subscription rights (and specifying the date on which the holders of Common
Stock shall be entitled thereto) or for determining rights to vote in respect of
the matters referred to in (c) and (d) above; and
(ii) in the case of the matters referred to in (c)
and (d) above, at least 20 days' prior written notice of the date when the same
shall take place (and specifying the date on which the holders of the Series A
Stock, Series B Stock, Series C Stock, Series D Stock and Common Stock shall be
entitled to exchange their shares of Series A Stock, Series B Stock, Series C
Stock, Series D Stock and Common Stock for securities or other property
deliverable upon the occurrence of such events).
Such written notice shall describe the material terms and conditions of
such proposed action, including a description of the stock, cash and property to
be received by the holders of shares of Common Stock upon consummation of the
proposed action and the date of delivery thereof. If any material change in the
facts set forth in the initial notice shall occur, the corporation shall
promptly give written notice to each holder of shares of Series A Stock, Series
B Stock, Series C Stock and Series D Stock of such material change.
Any notice required by the provisions of this Section 4.3 to be given
to the holders of shares of Series A Stock, Series B Stock, Series C Stock and
Series D Stock shall be deemed given if deposited in the United States mail,
postage prepaid and addressed to each holder of record at such holder's address
appearing on the books of the corporation.
ARTICLE 5. LIMITATION OF DIRECTOR LIABILITY
To the fullest extent that the Oregon Business Corporation Act, as it
exists on the date hereof or may hereafter be amended, permits the limitation or
elimination of
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the liability of directors, a director of the corporation shall not be liable to
the corporation or its shareholders for any monetary damages for conduct as a
director. Any amendment to or repeal of this Article or amendment to the Oregon
Business Corporation Act shall not adversely affect any right or protection of a
director of the corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment or repeal.
ARTICLE 6. INDEMNIFICATION
To the fullest extent not prohibited by law, the corporation: (i) shall
indemnify from and against any and all costs, expenses (including reasonable
attorneys' fees), judgments, fines and amounts paid in settlement of or arising
from such action, suit or proceeding any person who is made, or threatened to be
made, a party to an action, suit or proceeding, whether civil, criminal,
administrative, investigative, or otherwise (including an action, suit or
proceeding by or in the right of the corporation), by reason of the fact that
the person is or was a director of the corporation, and (ii) may indemnify from
and against any and all costs, expenses (including reasonable attorneys' fees),
judgments, fines and amounts paid in settlement of or arising from such action,
suit or proceeding any person who is made, or threatened to be made, a party to
an action, suit or proceeding, whether civil, criminal, administrative,
investigative, or otherwise (including an action, suit or proceeding by or in
the right of the corporation), by reason of the fact that the person is or was
an officer, employee or agent of the corporation, or a fiduciary (within the
meaning of the Employee Retirement Income Security Act of 1974), with respect to
any employee benefit plan of the corporation, or serves or served at the request
of the corporation as a director or officer of, or as a fiduciary (as defined
above) of an employee benefit plan of, another corporation, partnership, joint
venture, trust or other enterprise. This Article shall not be deemed exclusive
of any other provisions for the indemnification of directors, officers,
employees, or agents that may be included in any statute, bylaw, agreement,
resolution of shareholders or directors or otherwise, both as to action in any
official capacity and action in any other capacity while holding office, or
while an employee or agent of the corporation. For purposes of this Article,
"corporation" shall mean the corporation incorporated hereunder and any
successor corporation thereof.
ARTICLE 7. NOTICES
The address where the State of Oregon Corporation Division may mail
notices to the corporation is:
1211 S.W. Fifth Avenue, Suite 1500
Portland, OR 97204
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<PAGE> 1
EXHIBIT 3.3
BYLAWS
OF
800.COM, INC.
Originally adopted as of: December 31, 1997
Amendments are listed on page i
<PAGE> 2
AMENDMENTS
<TABLE>
<CAPTION>
Section Effect of Amendment Date of Amendment
- ------- ------------------- -----------------
<S> <C> <C>
All Name changed to 800.COM, Inc. May 26, 1998
3.2 The number of Directors on the Board of March 16, 1999
Directors is changed to no effective March 22, 1999
less than one and no more than seven.
</TABLE>
Page i
<PAGE> 3
CONTENTS
<TABLE>
<S> <C> <C>
SECTION 1. OFFICES ................................................................................... 1
SECTION 2. SHAREHOLDERS .............................................................................. 1
2.1 Annual Meeting ............................................................................ 1
2.2 Special Meetings .......................................................................... 1
2.3 Place of Meeting .......................................................................... 1
2.4 Notice of Meeting ......................................................................... 2
2.5 Waiver of Notice .......................................................................... 2
2.6 Fixing of Record Date for Determining Shareholders ........................................ 3
2.7 Shareholders' List ........................................................................ 3
2.8 Quorum .................................................................................... 4
2.9 Manner of Acting .......................................................................... 4
2.10 Proxies ................................................................................... 4
2.11 Voting of Shares .......................................................................... 5
2.12 Voting for Directors ...................................................................... 5
2.13 Action by Shareholders Without a Meeting .................................................. 5
2.14 Voting of Shares by Corporations .......................................................... 5
2.14.1 Shares Held by Another Corporation ......................................... 5
2.14.2 Shares Held by the Corporation ............................................. 5
2.15 Acceptance or Rejection of Shareholder Votes, Consents, Waivers and Proxy Appointments .... 6
2.15.1 Documents Bearing Name of Shareholders ..................................... 6
2.15.2 Documents Bearing Name of Third Parties .................................... 6
2.15.3 Rejection of Documents ..................................................... 6
SECTION 3. BOARD OF DIRECTORS ........................................................................ 7
3.1 General Powers ............................................................................ 7
3.2 Number, Tenure and Qualifications ......................................................... 7
3.3 Annual and Regular Meetings ............................................................... 7
</TABLE>
Page i
<PAGE> 4
<TABLE>
<S> <C> <C>
3.4 Special Meetings .......................................................................... 7
3.5 Meetings by Telecommunications ............................................................ 7
3.6 Notice of Special Meetings ................................................................ 8
3.6.1 Personal Delivery .......................................................... 8
3.6.2 Delivery by Mail ........................................................... 8
3.6.3 Delivery by Telegraph ...................................................... 8
3.6.4 Oral Notice ................................................................ 8
3.6.5 Notice by Facsimile Transmission ........................................... 8
3.6.6 Notice by Private Courier .................................................. 9
3.7 Waiver of Notice .......................................................................... 9
3.7.1 Written Waiver ............................................................. 9
3.7.2 Waiver by Attendance ....................................................... 9
3.8 Quorum .................................................................................... 9
3.9 Manner of Acting .......................................................................... 9
3.10 Presumption of Assent ..................................................................... 9
3.11 Action by Board or Committees Without a Meeting ........................................... 10
3.12 Resignation ............................................................................... 10
3.13 Removal ................................................................................... 10
3.14 Vacancies ................................................................................. 11
3.15 Minutes ................................................................................... 11
3.16 Executive and Other Committees ............................................................ 11
3.16.1 Creation of Committees ..................................................... 11
3.16.2 Authority of Committees .................................................... 11
3.16.3 Quorum and Manner of Acting ................................................ 12
3.16.4 Minutes of Meetings ........................................................ 12
3.16.5 Resignation ................................................................ 12
3.16.6 Removal .................................................................... 12
3.17 Compensation .............................................................................. 12
</TABLE>
Page ii
<PAGE> 5
<TABLE>
<S> <C> <C>
SECTION 4. OFFICERS .................................................................................. 13
4.1 Number .................................................................................... 13
4.2 Appointment and Term of Office ............................................................ 13
4.3 Resignation ............................................................................... 13
4.4 Removal ................................................................................... 13
4.5 Vacancies ................................................................................. 14
4.6 Chair of the Board ........................................................................ 14
4.7 President ................................................................................. 14
4.8 Vice President ............................................................................ 14
4.9 Secretary ................................................................................. 15
4.10 Treasurer ................................................................................. 15
4.11 Salaries .................................................................................. 15
SECTION 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS ..................................................... 16
5.1 Contracts ................................................................................. 16
5.2 Loans to the Corporation .................................................................. 16
5.3 Loans to Directors ........................................................................ 16
5.4 Checks, Drafts, Etc. ...................................................................... 16
5.5 Deposits .................................................................................. 16
SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER ................................................ 17
6.1 Issuance of Shares ........................................................................ 17
6.2 Escrow for Shares ......................................................................... 17
6.3 Certificates for Shares ................................................................... 17
6.4 Stock Records ............................................................................. 17
6.5 Restriction on Transfer ................................................................... 18
6.5.1 Securities Laws ............................................................ 18
6.5.2 Other Restrictions ......................................................... 18
6.6 Transfer of Shares ........................................................................ 18
6.7 Lost or Destroyed Certificates ............................................................ 18
</TABLE>
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<PAGE> 6
<TABLE>
<S> <C> <C>
6.8 Transfer Agent and Registrar .............................................................. 18
6.9 Officer Ceasing to Act .................................................................... 19
6.10 Fractional Shares ......................................................................... 19
SECTION 7. BOOKS AND RECORDS ......................................................................... 19
SECTION 8. FISCAL YEAR ............................................................................... 19
SECTION 9. SEAL ...................................................................................... 19
SECTION 10. INDEMNIFICATION ........................................................................... 19
10.1 Directors ................................................................................. 19
10.2 Officers, Employees and Other Agents ...................................................... 19
10.3 No Presumption of Bad Faith ............................................................... 20
10.4 Advances of Expenses ...................................................................... 20
10.5 Enforcement ............................................................................... 20
10.6 Nonexclusivity of Rights .................................................................. 21
10.7 Survival of Rights ........................................................................ 21
10.8 Insurance ................................................................................. 21
10.9 Amendments to Law ......................................................................... 21
10.10 Savings Clause ............................................................................ 22
10.11 Certain Definitions ....................................................................... 22
SECTION 11. AMENDMENTS ................................................................................ 23
</TABLE>
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<PAGE> 7
BYLAWS
OF
800.COM, INC.
SECTION 1. OFFICES
The principal office of the Corporation shall be located at the
principal place of business or such other place as the Board of Directors (the
"Board") may designate. The Corporation may have such other offices, either
within or without the State of Oregon, as the Board may designate or as the
business of the Corporation may require from time to time.
SECTION 2. SHAREHOLDERS
2.1 ANNUAL MEETING
The annual meeting of the shareholders shall be held the second Tuesday
of February in each year, or on such other day as shall be fixed by resolution
of the Board, at the principal office of the Corporation or such other place as
fixed by the Board, for the purpose of electing Directors and transacting such
other business as may properly come before the meeting. If the day fixed for the
annual meeting is a legal holiday at the place of the meeting, the meeting shall
be held on the next succeeding business day.
2.2 SPECIAL MEETINGS
The Board, the President or the Chair of the Board may call special
meetings of the shareholders for any purpose. The holders of not less than
one-tenth of all the outstanding shares of the Corporation entitled to vote on
any issue proposed to be considered at the proposed special meeting, if they
date, sign and deliver to the Corporation's Secretary a written demand for a
special meeting describing the purpose(s) for which it is to be held, may call a
special meeting of the shareholders for such stated purpose(s).
2.3 PLACE OF MEETING
All meetings shall be held at the principal office of the Corporation or
at such other place as designated by the Board, by any persons entitled to call
a meeting
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<PAGE> 8
hereunder, or in a waiver of notice signed by all of the shareholders entitled
to vote at the meeting.
2.4 NOTICE OF MEETING
(a) The Corporation shall cause to be delivered to each shareholder
entitled to notice of or to vote at an annual or special meeting of
shareholders, either personally or by mail, not less than ten (10) nor more than
sixty (60) days before the meeting, written notice stating the date, time and
place of the meeting and, in the case of a special meeting, the purpose(s) for
which the meeting is called.
(b) Notice to a shareholder of an annual or special shareholder meeting
shall be in writing. Such notice, if in comprehensible form, is effective (a)
when mailed, if it is mailed postpaid and is correctly addressed to the
shareholder's address shown in the Corporation's then-current record of
shareholders, or (b) when received by the shareholder, if it is delivered by
telegraph, facsimile transmission or private courier.
(c) If an annual or special shareholders' meeting is adjourned to a
different date, time, or place, notice need not be given of the new date, time,
or place if the new date, time, or place is announced at the meeting before
adjournment, unless a new record date for the adjourned meeting is or must be
fixed under Section 2.6(a) of these bylaws or the Oregon Business Corporation
Act.
2.5 WAIVER OF NOTICE
(a) Whenever any notice is required to be given to any shareholder under
the provisions of these Bylaws, the Articles of Incorporation or the Oregon
Business Corporation Act, a waiver thereof in writing, signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, and delivered to the Corporation for inclusion in the minutes for
filing with the corporate records, shall be deemed equivalent to the giving of
such notice.
(b) The attendance of a shareholder at a meeting waives objection to
lack of, or defect in, notice of such meeting or of consideration of a
particular matter at the meeting, unless the shareholder, at the beginning of
the meeting or prior to consideration of such matter, objects to holding the
meeting, transacting business at the meeting, or considering the matter when
presented at the meeting.
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<PAGE> 9
2.6 FIXING OF RECORD DATE FOR DETERMINING SHAREHOLDERS
(a) For the purpose of determining shareholders entitled to notice of,
or to vote at, any meeting of shareholders or any adjournment thereof, or
shareholders entitled to receive payment of any dividend, or in order to make a
determination of shareholders for any other purpose, the Board may fix in
advance a date as the record date for any such determination. Such record date
shall be not more than seventy (70) days, and in case of a meeting of
shareholders, not less than ten (10) days, prior to the date on which the
particular action requiring such determination is to be taken. If no record date
is fixed for the determination of shareholders entitled to notice of or to vote
at a meeting, or to receive payment of a dividend, the date on which the notice
of meeting is mailed or on which the resolution of the Board declaring such
dividend is adopted, as the case may be, shall be the record date for such
determination. Such determination shall apply to any adjournment of the meeting,
provided such adjournment is not set for a date more than 120 days after the
date fixed for the original meeting.
(b) The record date for the determination of shareholders entitled to
demand a special shareholder meeting shall be the date the first shareholder
signs the demand.
2.7 SHAREHOLDERS' LIST
(a) Beginning two (2) business days after notice of a meeting of
shareholders is given, a complete alphabetical list of the shareholders entitled
to notice of such meeting shall be made, arranged by voting group, and within
each voting group by class or series, with the address of and number of shares
held by each shareholder. This record shall be kept on file at the Corporation's
principal office or at a place identified in the meeting notice in the city
where the meeting will be held. On written demand, this record shall be subject
to inspection by any shareholder at any time during normal business hours. Such
record shall also be kept open at such meeting for inspection by any
shareholder.
(b) A shareholder may, on written demand, copy the shareholders' list at
such shareholder's expense during regular business hours, provided that:
(i) Such shareholder's demand is made in good faith and for a proper
purpose;
(ii) Such shareholder has described with reasonable particularity
such shareholder's purpose in the written demand; and
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<PAGE> 10
(iii) The shareholders' list is directly connected with such
shareholder's purpose.
2.8 QUORUM
A majority of the votes entitled to be cast on a matter at a meeting by
a voting group, represented in person or by proxy, shall constitute a quorum of
that voting group for action on that matter at a meeting of the shareholders. If
a quorum is not present for a matter to be acted upon, a majority of the shares
represented at the meeting may adjourn the meeting from time to time without
further notice. If the necessary quorum is present or represented at a
reconvened meeting following such an adjournment, any business may be transacted
that might have been transacted at the meeting as originally called. The
shareholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
2.9 MANNER OF ACTING
(a) If a quorum exists, action on a matter (other than the election of
Directors) by a voting group is approved if the votes cast within the voting
group favoring the action exceed the votes cast opposing the action, unless the
affirmative vote of a greater number is required by these Bylaws, the Articles
of Incorporation or the Oregon Business Corporation Act.
(b) If a matter is to be voted on by a single group, action on that
matter is taken when voted upon by that voting group. If a matter is to be voted
on by two or more voting groups, action on that matter is taken only when voted
upon by each of those voting groups counted separately. Action may be taken by
one voting group on a matter even though no action is taken by another voting
group entitled to vote on such matter.
2.10 PROXIES
A shareholder may vote by proxy executed in writing by the shareholder
or by his or her attorney-in-fact. Such proxy shall be effective when received
by the Secretary or other officer or agent authorized to tabulate votes at the
meeting. A proxy shall become invalid eleven (11) months after the date of its
execution, unless otherwise expressly provided in the proxy. A proxy for a
specified meeting shall entitle the holder thereof to vote at any adjournment of
such meeting but shall not be valid after the final adjournment thereof.
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<PAGE> 11
2.11 VOTING OF SHARES
Each outstanding share entitled to vote shall be entitled to one vote
upon each matter submitted to a vote at a meeting of shareholders.
2.12 VOTING FOR DIRECTORS
Each shareholder may vote, in person or by proxy, the number of shares
owned by such shareholder that are entitled to vote at an election of Directors,
for as many persons as there are Directors to be elected and for whose election
such shares have a right to vote. Unless otherwise provided in the Articles of
Incorporation, Directors are elected by a plurality of the votes cast by shares
entitled to vote in the election at a meeting at which a quorum is present.
2.13 ACTION BY SHAREHOLDERS WITHOUT A MEETING
Any action which could be taken at a meeting of the shareholders may be
taken without a meeting if a written consent setting forth the action so taken
is signed by all shareholders entitled to vote with respect to the subject
matter thereof. The action shall be effective on the date on which the last
signature is placed on the consent, or at such earlier or later time as is set
forth therein. Such written consent, which shall have the same force and effect
as a unanimous vote of the shareholders, shall be inserted in the minute book as
if it were the minutes of a meeting of the shareholders.
2.14 VOTING OF SHARES BY CORPORATIONS
2.14.1 SHARES HELD BY ANOTHER CORPORATION
Shares standing in the name of another corporation may be voted by such
officer, agent or proxy as the bylaws of such other corporation may prescribe,
or, in the absence of such provision, as the board of directors of such
corporation may determine; provided, however, such shares are not entitled to
vote if the Corporation owns, directly or indirectly, a majority of the shares
entitled to vote for directors of such other corporation.
2.14.2 SHARES HELD BY THE CORPORATION
Authorized but unissued shares shall not be voted or counted for
determining whether a quorum exists at any meeting or counted in determining the
total number of outstanding shares at any given time. Notwithstanding the
foregoing, shares of its own stock held by the Corporation in a fiduciary
capacity may be counted for purposes of determining whether a quorum exists, and
may be voted by the Corporation.
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<PAGE> 12
2.15 ACCEPTANCE OR REJECTION OF SHAREHOLDER VOTES, CONSENTS, WAIVERS AND PROXY
APPOINTMENTS
2.15.1 DOCUMENTS BEARING NAME OF SHAREHOLDERS
If the name signed on a vote, consent, waiver or proxy appointment
corresponds to the name of a shareholder, the Secretary or other agent
authorized to tabulate votes at the meeting may, if acting in good faith, accept
such vote, consent, waiver or proxy appointment and give it effect as the act of
the shareholder.
2.15.2 DOCUMENTS BEARING NAME OF THIRD PARTIES
If the name signed on a vote, consent, waiver or proxy appointment does
not correspond to the name of its shareholder, the Secretary or other agent
authorized to tabulate votes at the meeting may nevertheless, if acting in good
faith, accept such vote, consent, waiver or proxy appointment and give it effect
as the act of the shareholder if:
(a) The shareholder is an entity and the name signed purports to be that
of an officer or an agent of the entity;
(b) The name signed purports to be that of an administrator, executor,
guardian or conservator representing the shareholder and, if the Secretary or
other agent requests, acceptable evidence of fiduciary status has been
presented;
(c) The name signed purports to be that of a receiver or trustee in
bankruptcy of the shareholder, and, if the Secretary or other agent requests,
acceptable evidence of this status has been presented;
(d) The name signed purports to be that of a pledgee, beneficial owner
or attorney-in-fact of the shareholder and, if the Secretary or other agent
requests, acceptable evidence of the signatory's authority to sign has been
presented; or
(e) Two or more persons are the shareholder as cotenants or fiduciaries
and the name signed purports to be the name of at least one of the co-owners and
the person signing appears to be acting on behalf of all co-owners.
2.15.3 REJECTION OF DOCUMENTS
The Secretary or other agent authorized to tabulate votes at the meeting
is entitled to reject a vote, consent, waiver or proxy appointment if such
agent, acting in good faith, has reasonable basis for doubt about the validity
of the signature on it or about the signatory's authority to sign for the
shareholder.
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SECTION 3. BOARD OF DIRECTORS
3.1 GENERAL POWERS
The business and affairs of the Corporation shall be managed by the
Board, except as may be otherwise provided in these Bylaws, the Articles of
Incorporation or the Oregon Business Corporation Act.
3.2 NUMBER, TENURE AND QUALIFICATIONS
The Board shall consist of no less than one and no more than seven
Directors, the specific number to be set by resolution of the Board or the
shareholders. The number of Directors may be changed from time to time by
amendment to these Bylaws, but no decrease in the number of Directors shall
shorten the term of any incumbent Director. The terms of the Directors expire at
the next annual shareholder's meeting following their election. Despite the
expiration of a Director's term, however, the Director continues to serve until
the Director's successor is elected and qualifies or until there is a decrease
in the number of Directors. Directors need not be shareholders of the
Corporation or residents of the State of Oregon.
3.3 ANNUAL AND REGULAR MEETINGS
An annual Board meeting shall be held without further notice immediately
after and at the same place as the annual meeting of shareholders.
By resolution the Board, or any committee thereof, may specify the time
and place for holding regular meetings thereof without other notice than such
resolution.
3.4 SPECIAL MEETINGS
Special meetings of the Board or any committee designated by the Board
may be called by or at the request of the Chair of the Board, or the President
or any one Director and, in the case of any special meeting of any committee
designated by the Board, by the Chair thereof. The person or persons authorized
to call special meetings may fix any place either within or without the State of
Oregon as the place for holding any special Board or committee meeting called by
them.
3.5 MEETINGS BY TELECOMMUNICATIONS
Members of the Board or any committee designated by the Board may
participate in a meeting of such Board or committee by use of any means of
communication by which all persons participating may simultaneously hear each
other
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during the meeting. Participation by such means shall be deemed presence in
person at the meeting.
3.6 NOTICE OF SPECIAL MEETINGS
Notice of a special Board or committee meeting stating the date, time
and place of the meeting shall be given to a Director in writing or orally by
telephone or in person as set forth below. Neither the business to be transacted
at, nor the purpose of, any special meeting need be specified in the notice of
such meeting.
3.6.1 PERSONAL DELIVERY
If delivery is by personal service, the notice shall be effective if
delivered at such address at least one day before the meeting.
3.6.2 DELIVERY BY MAIL
If notice is delivered by mail, the notice shall be deemed effective if
deposited in the official government mail at least five days before the meeting
properly addressed to a Director at his or her address shown on the records of
the Corporation with postage prepaid.
3.6.3 DELIVERY BY TELEGRAPH
If notice is delivered by telegraph, the notice shall be deemed
effective if the content thereof is delivered to the telegraph company by such
time that the telegraph company guarantees delivery at least one day before the
meeting.
3.6.4 ORAL NOTICE
If notice is delivered orally, by telephone or in person, the notice
shall be effective if personally given to a Director at least one day before the
meeting.
3.6.5 NOTICE BY FACSIMILE TRANSMISSION
If notice is delivered by facsimile transmission, the notice shall be
deemed effective if the content thereof is transmitted to the office of a
Director, at the facsimile number shown on the records of the Corporation, at
least one day before the meeting, and receipt is either confirmed by confirming
transmission equipment or acknowledged by the receiving office.
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3.6.6 NOTICE BY PRIVATE COURIER
If notice is delivered by private courier, the notice shall be deemed
effective if delivered to the courier, properly addressed and prepaid, by such
time that the courier guarantees delivery at least one day before the meeting.
3.7 WAIVER OF NOTICE
3.7.1 WRITTEN WAIVER
Whenever any notice is required to be given to any Director under the
provisions of these Bylaws, the Articles of Incorporation or the Oregon Business
Corporation Act, a waiver thereof in writing, executed at any time, specifying
the meeting for which notice is waived, signed by the person or persons entitled
to such notice, and filed with the minutes or corporate records, shall be deemed
equivalent to the giving of such notice.
3.7.2 WAIVER BY ATTENDANCE
The attendance of a Director at a Board or committee meeting shall
constitute a waiver of notice of such meeting, unless the Director, at the
beginning of the meeting, or promptly upon such Director's arrival, objects to
holding the meeting or transacting any business at the meeting and does not
thereafter vote for or assent to action taken at the meeting.
3.8 QUORUM
A majority of the number of Directors fixed by or in the manner provided
by these Bylaws shall constitute a quorum for the transaction of business at any
Board meeting.
3.9 MANNER OF ACTING
The act of the majority of the Directors present at a Board or committee
meeting at which there is a quorum shall be the act of the Board or committee,
unless the vote of a greater number is required by these Bylaws, the Articles of
Incorporation or the Oregon Business Corporation Act.
3.10 PRESUMPTION OF ASSENT
A Director of the Corporation present at a Board or committee meeting at
which action on any corporate matter is taken shall be deemed to have assented
to the action taken unless such Director objects at the beginning of the
meeting, or promptly
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upon such Director's arrival, to holding the meeting or transacting business at
the meeting; or such Director's dissent is entered in the minutes of the
meeting; or such Director delivers a written notice of dissent or abstention to
such action with the presiding officer of the meeting before the adjournment
thereof; or such Director forwards such notice by registered mail to the
Secretary of the Corporation immediately after the adjournment of the meeting. A
Director who voted in favor of such action may not thereafter dissent or
abstain.
3.11 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING
Any action which could be taken at a meeting of the Board or of any
committee appointed by the Board may be taken without a meeting if a written
consent setting forth the action so taken is signed by each Director or by each
committee member. The action shall be effective when the last signature is
placed on the consent, unless the consent specifies an earlier or later date.
Such written consent, which shall have the same effect as a unanimous vote of
the Directors or such committee, shall be inserted in the minute book as if it
were the minutes of a Board or committee meeting.
3.12 RESIGNATION
Any Director may resign at any time by delivering written notice to the
Chair of the Board, the Board, or to the registered office of the Corporation.
Such resignation shall take effect at the time specified in the notice, or if no
time is specified, upon delivery. Unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective. Once
delivered, a notice of resignation is irrevocable unless revocation is permitted
by the Board.
3.13 REMOVAL
One or more members of the Board (including the entire Board) may be
removed at a meeting of shareholders called expressly for that purpose, provided
that the notice of such meeting states that the purpose, or one of the purposes,
of the meeting is such removal. A member of the Board may be removed with or
without cause, unless the Articles of Incorporation permit removal for cause
only, by a vote of the holders of a majority of the shares then entitled to vote
on the election of the Director(s). A Director may be removed only if the number
of votes cast to remove the Director exceeds the number of votes cast to not
remove the Director. If a Director is elected by a voting group of shareholders,
only the shareholders of that voting group may participate in the vote to remove
such Director.
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3.14 VACANCIES
Any vacancy occurring on the Board, including a vacancy resulting from
an increase in the number of Directors, may be filled by the shareholders, by
the Board, by the affirmative vote of a majority of the remaining Directors
though less than a quorum of the Board, or by a sole remaining Director. A
Director elected to fill a vacancy shall be elected for the unexpired term of
his or her predecessor in office; except that the term of a Director elected by
the Board to fill a vacancy expires at the next shareholders' meeting at which
Directors are elected. Any Directorship to be filled by reason of an increase in
the number of Directors may be filled by the affirmative vote of a majority of
the number of Directors fixed by the Bylaws prior to such increase for a term of
office continuing only until the next election of Directors by the shareholders.
Any Directorship not so filled by the Directors shall be filled by election at
the next annual meeting of shareholders or at a special meeting of shareholders
called for that purpose. If the vacant Directorship is filled by the
shareholders and was held by a Director elected by a voting group of
shareholders, then only the holders of shares of that voting group are entitled
to vote to fill such vacancy. A vacancy that will occur at a specific later date
by reason of a resignation effective at such later date or otherwise may be
filled before the vacancy occurs, but the new Director may not take office until
the vacancy occurs.
3.15 MINUTES
The Board shall keep minutes of its meetings and shall cause them to be
recorded in books kept for that purpose.
3.16 EXECUTIVE AND OTHER COMMITTEES
3.16.1 CREATION OF COMMITTEES
The Board, by resolution adopted by a majority of the number of
Directors fixed in the manner provided by these Bylaws, may appoint standing or
temporary committees, including an Executive Committee, from its own number and
consisting of no less than two (2) Directors. The Board may invest such
committee(s) with such powers as it may see fit, subject to such conditions as
may be prescribed by the Board, these Bylaws, the Articles of Incorporation and
the Oregon Business Corporation Act.
3.16.2 AUTHORITY OF COMMITTEES
Each committee shall have and may exercise all of the authority of the
Board to the extent provided in the resolution of the Board designating the
committee and any
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subsequent resolutions pertaining thereto and adopted in like manner, except
that no such committee shall have the authority to (a) authorize distributions,
except as may be permitted by Section 3.16.2(g) of these Bylaws; (b) approve or
propose to shareholders actions required by the Oregon Business Corporation Act
to be approved by shareholders; (c) fill vacancies on the Board or any committee
thereof; (d) adopt, amend or repeal these Bylaws; (e) amend the Articles of
Incorporation; (f) approve a plan of merger not requiring shareholder approval;
or (g) authorize or approve reacquisition of shares, except within limits
prescribed by the Board.
3.16.3 QUORUM AND MANNER OF ACTING
A majority of the number of Directors composing any committee of the
Board, as established and fixed by resolution of the Board, shall constitute a
quorum for the transaction of business at any meeting of such committee.
3.16.4 MINUTES OF MEETINGS
All committees so appointed shall keep regular minutes of their meetings
and shall cause them to be recorded in books kept for that purpose.
3.16.5 RESIGNATION
Any member of any committee may resign at any time by delivering written
notice thereof to the Board, the Chair of the Board or the Corporation. Any such
resignation shall take effect at the time specified in the notice, or if no time
is specified, upon delivery. Unless otherwise specified therein, the acceptance
of such resignation shall not be necessary to make it effective. Once delivered,
a notice of resignation is irrevocable unless revocation is permitted by the
Board.
3.16.6 REMOVAL
The Board may remove from office any member of any committee elected or
appointed by it, but only by the affirmative vote of not less than a majority of
the number of Directors fixed by or in the manner provided by these Bylaws.
3.17 COMPENSATION
By Board resolution, Directors and committee members may be paid their
expenses, if any, of attendance at each Board or committee meeting, or a fixed
sum for attendance at each Board or committee meeting, or a stated salary as
Director or a committee member, or a combination of the foregoing. No such
payment shall preclude any Director or committee member from serving the
Corporation in any other capacity and receiving compensation therefor.
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SECTION 4. OFFICERS
4.1 NUMBER
The Officers of the Corporation shall be a President and a Secretary,
each of whom shall be appointed by the Board. One or more Vice Presidents, a
Treasurer and such other Officers and assistant Officers, including a Chair of
the Board, may be appointed by the Board; such Officers and assistant Officers
to hold office for such period, have such authority and perform such duties as
are provided in these Bylaws or as may be provided by resolution of the Board.
Any Officer may be assigned by the Board any additional title that the Board
deems appropriate. The Board may delegate to any Officer or agent the power to
appoint any such subordinate Officers or agents and to prescribe their
respective terms of office, authority and duties. Any two or more offices may be
held by the same person.
4.2 APPOINTMENT AND TERM OF OFFICE
The Officers of the Corporation shall be appointed annually by the Board
at the Board meeting held after the annual meeting of the shareholders. If the
appointment of Officers is not made at such meeting, such appointment shall be
made as soon thereafter as a Board meeting conveniently may be held. Unless an
Officer dies, resigns, or is removed from office, he or she shall hold office
until the next annual meeting of the Board or until his or her successor is
appointed.
4.3 RESIGNATION
Any Officer may resign at any time by delivering written notice to the
Corporation. Any such resignation shall take effect at the time specified in the
notice, or if no time is specified, upon delivery. Unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective. Once delivered, a notice of resignation is irrevocable unless
revocation is permitted by the Board.
4.4 REMOVAL
Any Officer or agent appointed by the Board may be removed by the Board,
with or without cause, but such removal shall be without prejudice to the
contract rights, if any, of the person so removed. Appointment of an Officer or
agent shall not of itself create contract rights.
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4.5 VACANCIES
A vacancy in any office because of death, resignation, removal,
disqualification, creation of a new office or any other cause may be filled by
the Board for the unexpired portion of the term, or for a new term established
by the Board. If a resignation is made effective at a later date, and the
Corporation accepts such future effective date, the Board may fill the pending
vacancy before the effective date, if the Board provides that the successor does
not take office until the effective date.
4.6 CHAIR OF THE BOARD
If appointed, the Chair of the Board shall perform such duties as shall
be assigned to him or her by the Board from time to time and shall preside over
meetings of the Board and shareholders unless another Officer is appointed or
designated by the Board as Chair of such meeting.
4.7 PRESIDENT
The President shall be the chief executive Officer of the Corporation
unless some other Officer is so designated by the Board, shall preside over
meetings of the Board and shareholders in the absence of a Chair of the Board
and, subject to the Board's control, shall supervise and control all of the
assets, business and affairs of the Corporation. The President shall have
authority to sign deeds, mortgages, bonds, contracts, or other instruments,
except when the signing and execution thereof have been expressly delegated by
the Board or by these Bylaws to some other Officer or agent of the Corporation,
or are required by law to be otherwise signed or executed by some other Officer
or in some other manner. In general, the President shall perform all duties
incident to the office of President and such other duties as are prescribed by
the Board from time to time.
4.8 VICE PRESIDENT
In the event of the death of the President or his or her inability to
act, the Vice President (or if there is more than one Vice President, the Vice
President who was designated by the Board as the successor to the President, or
if no Vice President is so designated, the Vice President first appointed to
such office) shall perform the duties of the President, except as may be limited
by resolution of the Board, with all the powers of and subject to all the
restrictions upon the President. Vice Presidents shall have, to the extent
authorized by the President or the Board, the same powers as the President to
sign deeds, mortgages, bonds, contracts or other instruments. Vice
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Presidents shall perform such other duties as from time to time may be assigned
to them by the President or by the Board.
4.9 SECRETARY
The Secretary shall (a) prepare and keep the minutes of meetings of the
shareholders and the Board in one or more books provided for that purpose; (b)
see that all notices are duly given in accordance with the provisions of these
Bylaws or as required by law; (c) be responsible for custody of the corporate
records and seal of the corporation; (d) keep registers of the post office
address of each shareholder and Director; (e) have general charge of the stock
transfer books of the Corporation; and (f) in general perform all duties
incident to the office of Secretary and such other duties as from time to time
may be assigned to him or her by the President or by the Board. In the absence
of the Secretary, an Assistant Secretary may perform the duties of the
Secretary.
4.10 TREASURER
If required by the Board, the Treasurer shall give a bond for the
faithful discharge of his or her duties in such amount and with such surety or
sureties as the Board shall determine. The Treasurer shall have charge and
custody of and be responsible for all funds and securities of the Corporation;
receive and give receipts for moneys due and payable to the Corporation from any
source whatsoever, and deposit all such moneys in the name of the Corporation in
banks, trust companies or other depositories selected in accordance with the
provisions of these Bylaws; and in general perform all of the duties incident to
the office of Treasurer and such other duties as from time to time may be
assigned to him or her by the President or by the Board. In the absence of the
Treasurer, an Assistant Treasurer may perform the duties of the Treasurer.
4.11 SALARIES
The salaries of the Officers shall be fixed from time to time by the
Board or by any person or persons to whom the Board has delegated such
authority. No Officer shall be prevented from receiving such salary by reason of
the fact that he or she is also a Director of the Corporation.
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SECTION 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS
5.1 CONTRACTS
The Board may authorize any Officer or Officers, or agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the Corporation. Such authority may be general or confined to
specific instances.
5.2 LOANS TO THE CORPORATION
No loans shall be contracted on behalf of the Corporation and no
evidences of indebtedness shall be issued in its name unless authorized by a
resolution of the Board. Such authority may be general or confined to specific
instances.
5.3 LOANS TO DIRECTORS
The Corporation shall not lend money to or guarantee the obligation of a
Director unless (a) the particular loan or guarantee is approved by a majority
of the votes represented by the outstanding voting shares of all classes, voting
as a single voting group, excluding the votes of the shares owned by or voted
under the control of the benefited Director; or (b) the Board determines that
the loan or guarantee benefits the Corporation and either approves the specific
loan or guarantee or a general plan authorizing the loans and guarantees. The
fact that a loan or guarantee is made in violation of this provision shall not
affect the borrower's liability on the loan.
5.4 CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for the payment of money, notes or
other evidences of indebtedness issued in the name of the Corporation shall be
signed by such Officer or Officers, or agent or agents, of the Corporation and
in such manner as is from time to time determined by resolution of the Board.
5.5 DEPOSITS
All funds of the Corporation not otherwise employed shall be deposited
from time to time to the credit of the Corporation in such banks, trust
companies or other depositories as the Board may select.
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SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 ISSUANCE OF SHARES
No shares of the Corporation shall be issued unless authorized by the
Board, which authorization shall include the maximum number of shares to be
issued and the consideration to be received for each share. Before the
Corporation issues shares, the Board shall determine that the consideration
received or to be received for such shares is adequate. Such determination by
the Board shall be conclusive insofar as the adequacy of consideration for the
issuance of shares relates to whether the shares are validly issued, fully paid
and nonassessable.
6.2 ESCROW FOR SHARES
The Board may authorize the placement in escrow of shares issued for a
contract for future services or benefits or a promissory note, or may authorize
other arrangements to restrict the transfer of shares, and may authorize the
crediting of distributions in respect of such shares against their purchase
price, until the services are performed, the note is paid or the benefits
received. If the services are not performed, the note is not paid, or the
benefits are not received, the Board may cancel, in whole or in part, such
shares placed in escrow or restricted and such distributions credited.
6.3 CERTIFICATES FOR SHARES
Certificates representing shares of the Corporation shall be in such
form as shall be determined by the Board. Such certificates shall be signed by
any two of the following officers: the Chair of the Board, the President, any
Vice President, the Treasurer, the Secretary or any Assistant Secretary. Any or
all of the signatures on a certificate may be facsimiles if the certificate is
manually signed on behalf of a transfer agent or a registrar other than the
Corporation itself or an employee of the Corporation. All certificates shall be
consecutively numbered or otherwise identified.
6.4 STOCK RECORDS
The stock transfer books shall be kept at the registered office or
principal place of business of the Corporation or at the office of the
Corporation's transfer agent or registrar. The name and address of each person
to whom certificates for shares are issued, together with the class and number
of shares represented by each such certificate and the date of issue thereof,
shall be entered on the stock transfer books of the Corporation. The person in
whose name shares stand on the books of the
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Corporation shall be deemed by the Corporation to be the owner thereof for all
purposes.
6.5 RESTRICTION ON TRANSFER
6.5.1 SECURITIES LAWS
Except to the extent that the Corporation has obtained an opinion of
counsel acceptable to the Corporation that transfer restrictions are not
required under applicable securities laws, or has otherwise satisfied itself
that such transfer restrictions are not required, all certificates representing
shares of the Corporation shall bear conspicuously on the front or back of the
certificate a legend or legends describing the restriction or restrictions.
6.5.2 OTHER RESTRICTIONS
In addition, the front or back of all certificates shall include
conspicuous written notice of any further restrictions which may be imposed on
the transferability of such shares.
6.6 TRANSFER OF SHARES
Transfer of shares of the Corporation shall be made only on the stock
transfer books of the Corporation pursuant to authorization or document of
transfer made by the holder of record thereof or by his or her legal
representative, who shall furnish proper evidence of authority to transfer, or
by his or her attorney-in-fact authorized by power of attorney duly executed and
filed with the Secretary of the Corporation. All certificates surrendered to the
Corporation for transfer shall be canceled and no new certificate shall be
issued until the former certificates for a like number of shares shall have been
surrendered and canceled.
6.7 LOST OR DESTROYED CERTIFICATES
In the case of a lost, destroyed or mutilated certificate, a new
certificate may be issued therefor upon such terms and indemnity to the
Corporation as the Board may prescribe.
6.8 TRANSFER AGENT AND REGISTRAR
The Board may from time to time appoint one or more Transfer Agents and
one or more Registrars for the shares of the Corporation, with such powers and
duties as the Board shall determine by resolution.
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6.9 OFFICER CEASING TO ACT
In case any officer who has signed or whose facsimile signature has been
placed upon a stock certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Corporation with the same effect
as if the signer were such officer at the date of its issuance.
6.10 FRACTIONAL SHARES
The Corporation shall not issue certificates for fractional shares.
SECTION 7. BOOKS AND RECORDS
The Corporation shall keep correct and complete books and records of
account, stock transfer books, minutes of the proceedings of its shareholders
and Board and such other records as may be necessary or advisable.
SECTION 8. FISCAL YEAR
The fiscal year of the Corporation shall be the calendar year, provided
that if a different fiscal year is at any time selected for purposes of federal
income taxes, the fiscal year shall be the year so selected.
SECTION 9. SEAL
The seal of the Corporation, if any, shall consist of the name of the
Corporation and the state of its incorporation.
SECTION 10. INDEMNIFICATION
10.1 DIRECTORS
The Corporation shall indemnify its directors to the fullest extent not
prohibited by law.
10.2 OFFICERS, EMPLOYEES AND OTHER AGENTS
The Corporation shall have the power to indemnify its officers,
employees and other agents to the fullest extent not prohibited by law.
10.3 NO PRESUMPTION OF BAD FAITH
The termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a
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presumption that the person did not act in good faith and in a manner which the
person reasonably believed to be in or not opposed to the best interests of this
Corporation, or, with respect to any criminal proceeding, that the person had
reasonable cause to believe that the conduct was unlawful.
10.4 ADVANCES OF EXPENSES
The expenses incurred by a director in any proceeding shall be paid by
the Corporation in advance at the written request of the director, if the
director:
(a) Furnishes the Corporation a written affirmation of such person's
good faith belief that such person is entitled to be indemnified by the
Corporation; and
(b) Furnishes the Corporation a written undertaking to repay such
advance to the extent that it is ultimately determined by a court that such
person is not entitled to be indemnified by the Corporation. Such advances shall
be made without regard to the person's ability to repay such expenses and
without regard to the person's ultimate entitlement to indemnification under
this Bylaw or otherwise.
10.5 ENFORCEMENT
Without the necessity of entering into an express contract, all rights
to indemnification and advances under this Bylaw shall be deemed to be
contractual rights and be effective to the same extent and as if provided for in
a contract between the Corporation and the director who serves in such capacity
at any time while this Bylaw and any other applicable law, if any, are in
effect. Any right to indemnification or advances granted by this Bylaw to a
director shall be enforceable by or on behalf of the person holding such right
in any court of competent jurisdiction if (a) the claim for indemnification or
advances is denied, in whole or in part, or (b) no disposition of such claim is
made within ninety (90) days of request thereof. The claimant in such
enforcement action, if successful in whole or in part, shall be entitled to be
also paid the expense of prosecuting the claim. It shall be a defense to any
such action (other than an action brought to enforce a claim for expenses
incurred in connection with any proceeding in advance of its final disposition
when the required affirmation and undertaking have been tendered to the
Corporation) that the claimant has not met the standards of conduct which makes
it permissible under the law for the Corporation to indemnify the claimant, but
the burden of proving such defense shall be on the Corporation. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel or its shareholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because the claimant has met the applicable standard of
conduct, nor an actual determination by the Corporation (including its
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Board of Directors, independent legal counsel or its shareholders) that the
claimant has not met such applicable standard of conduct, shall be a defense to
the action or create a presumption that the claimant has not met the applicable
standard of conduct.
10.6 NONEXCLUSIVITY OF RIGHTS
The rights conferred on any person by this Bylaw shall not be exclusive
of any other right which such person may have or hereafter acquire under any
statute, provision of articles of incorporation, bylaws, agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in the
person's official capacity and as to action in another capacity while holding
office. The Corporation is specifically authorized to enter into individual
contracts with any or all of its directors, officers, employees or agents
respecting indemnification and advances to the fullest extent not prohibited by
law.
10.7 SURVIVAL OF RIGHTS
The rights conferred on any person by this Bylaw shall continue as to a
person who has ceased to be a director, officer, employee or other agent and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
10.8 INSURANCE
To the fullest extent not prohibited by law, the Corporation, upon
approval by the Board of Directors, may purchase insurance on behalf of any
person required or permitted to be indemnified pursuant to this Bylaw.
10.9 AMENDMENTS TO LAW
For purposes of this Bylaw, the meaning of "law" within the phrase "to
the fullest extent not prohibited by law" shall include, but not be limited to,
the Oregon Business Corporation Act, as the same exists on the date hereof or as
it may be amended; provided, however, that in the case of any such amendment,
such amendment shall apply only to the extent that it permits the Corporation to
provide broader indemnification rights than the Act permitted the Corporation to
provide prior to such amendment.
10.10 SAVINGS CLAUSE
If this Bylaw or any portion hereof shall be invalidated on any ground
by any court of competent jurisdiction, the Corporation shall indemnify each
director to the fullest extent permitted by any applicable portion of this Bylaw
that shall not have been invalidated, or by any other applicable law.
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10.11 CERTAIN DEFINITIONS
For the purposes of this Section, the following definitions shall apply:
(a) The term "proceeding" shall be broadly construed and shall include,
without limitation, the investigation, preparation, prosecution, defense,
settlement and appeal of any threatened, pending or completed action, suit or
proceeding, whether brought in the right of the Corporation or otherwise and
whether civil, criminal, administrative or investigative, in which the director
may be or may have been involved as a party or otherwise by reason of the fact
that the director is or was a director of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
(b) The term "expenses" shall be broadly construed and shall include,
without limitation, all costs, charges and expenses (including fees and
disbursements of attorneys, accountants and other experts) actually and
reasonably incurred by a director in connection with any proceeding, all
expenses of investigations, judicial or administrative proceedings or appeals,
and any expenses of establishing a right to indemnification under these Bylaws,
but shall not include amounts paid in settlement, judgments or fines.
(c) "Corporation" shall mean 800.COM, INC. and any successor corporation
thereof.
(d) Reference to a "director," "officer," "employee" or "agent" of the
Corporation shall include, without limitation, situations where such person is
serving at the request of the Corporation as a director, officer, employee,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
(e) References to "other enterprises" shall include employee benefit
plans. References to "fines" shall include any excise taxes assessed on a person
with respect to any employee benefit plan. References to "serving at the request
of the Corporation" shall include any service as a director, officer, employee
or agent of the Corporation which imposes duties on, or involves services by,
such director, officer, employee or agent with respect to an employee benefit
plan, its participants, or beneficiaries. A person who acted in good faith and
in a manner the person reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the Corporation" as
referred to in this Bylaw.
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SECTION 11. AMENDMENTS
These Bylaws may be altered, amended or repealed and new Bylaws may be
adopted by the Board at any regular or special meeting of the Board; provided,
however, that the shareholders, in amending or repealing a particular Bylaw, may
provide expressly that the Board may not amend or repeal that Bylaw. The
shareholders may also make, alter, amend and repeal the Bylaws of the
Corporation at any annual meeting or at a special meeting called for that
purpose. All Bylaws made by the Board may be amended, repealed, altered or
modified by the shareholders at any regular or special meeting called for that
purpose.
The foregoing Bylaws were adopted by the Board of Directors of the
Corporation as of December 31, 1997 and amended by the Board on March 16, 1999
and effective on March 22, 1999.
/s/ Spencer Brown
-----------------------------------
Spencer J. Brown, Secretary
Page 23
<PAGE> 1
EXHIBIT 4.2
800.COM, INC.
THIRD AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
Dated as of
March __, 2000
<PAGE> 2
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Section 1. Registration Rights .........................................2
1.1 Definitions .................................................2
1.2 Request for Registration ....................................3
1.3 Company Registration ........................................5
1.4 Obligations of the Company ..................................5
1.5 Furnish Information .........................................7
1.6 Expenses of Demand Registration .............................7
1.7 Expenses of Company Registration ............................8
1.8 Underwriting Requirements ...................................8
1.9 Delay of Registration .......................................8
1.10 Indemnification .............................................9
1.11 Reports Under Securities Exchange Act of 1934 ..............11
1.12 Form S-3 Registration ......................................12
1.13 "Market Stand-Off" Agreement ...............................13
1.14 Assignment of Registration Rights ..........................13
1.15 Limitations on Subsequent Registration Rights ..............14
1.16 Termination ................................................14
Section 2. Covenants of the Company ...................................14
2.1 Delivery of Annual Financial Statements and Other
Information ................................................14
2.2 Delivery of Interim Financial Statements ...................15
2.3 Inspection .................................................15
2.4 Confidentiality ............................................16
2.5 Right of First Refusal .....................................16
2.6 Initial Public Offering; Right of First Refusal ............18
2.7 Life Insurance .............................................20
2.8 Reservation of Common Stock ................................20
</TABLE>
PAGE i
<PAGE> 3
<TABLE>
<S> <C> <C>
2.9 Assignment of Inventions and Confidentiality Agreements ....20
2.10 Compensation Committee .....................................20
2.11 Termination of Covenants ...................................20
Section 3.
Miscellaneous ..............................................21
3.1 Successors and Assigns .....................................21
3.2 Governing Law ..............................................21
3.3 Counterparts ...............................................21
3.4 Headings ...................................................21
3.5 Notices ....................................................22
3.6 Amendments and Waivers .....................................22
3.7 Severability ...............................................22
3.8 Entire Agreement ...........................................22
3.9 Attorneys' Fees ............................................23
</TABLE>
PAGE ii
<PAGE> 4
THIRD AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
THIS THIRD AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (this
"Agreement") is made as of March __, 2000, by and between 800.COM, INC., an
Oregon corporation (the "Company"), and the Investors listed on the signature
pages hereof (such investors being referred to herein, collectively, as the
"Investors" and, individually, each as an "Investor").
RECITALS
A. The Company issued and sold 4,000,000 shares of its Series A
Preferred Stock, $0.01 par value per share("Series A Stock"), pursuant to the
Series A Preferred Stock Purchase Agreement dated as of October 30, 1998, among
the Company and the Investors party thereto (the "Series A Stock Purchase
Agreement"). Such Series A Preferred Stock may, pursuant to the terms of the
Company's Fourth Amended and Restated Articles of Incorporation (the "Restated
Articles"), be converted into shares of Common Stock, $0.01 par value per share
("Common Stock"), of the Company.
B. The Company issued and sold 7,262,442 shares of its Series B
Preferred Stock, $0.01 par value per share (the "Series B Stock"), pursuant to
the Series B Preferred Stock Purchase Agreement dated as of March 22, 1999,
among the Company and the Investors party thereto (the "Series B Stock Purchase
Agreement"). Such Series B Stock may, pursuant to the terms of the Restated
Articles, be converted into shares of Common Stock.
C. The Company issued and sold 8,720,983 shares of its Series C
Preferred Stock, $0.01 par value per share (the "Series C Stock"), pursuant to
the Series C Preferred Stock Purchase Agreement dated as of October 19, 1999,
among the Company and the Investors party thereto (the "Series C Stock Purchase
Agreement"). Such Series C Stock may, pursuant to the terms of the Restated
Articles, be converted into shares of Common Stock.
D. The Company proposes to issue and sell shares of its Series D
Preferred Stock, $0.01 par value per share (the "Series D Stock"), pursuant to
the Series D Preferred Stock Purchase Agreement dated as of the date hereof,
among the Company and the Investors party thereto (the "Series D Stock Purchase
Agreement"). Such Series D Stock may, pursuant to the terms of the Restated
Articles, be converted into shares of Common Stock.
E. As a condition precedent to the closing of the transactions
contemplated in the Series D Stock Purchase Agreement, the Company has agreed to
enter into this Agreement.
PAGE 1
<PAGE> 5
AGREEMENT
NOW, THEREFORE, in consideration of the premises, mutual covenants and
agreements contained herein, and other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereby agree
as follows:
SECTION 1. REGISTRATION RIGHTS
The Company covenants and agrees as follows:
1.1 DEFINITIONS
For purposes of this Agreement:
(a) The term "Holder" means any party hereto owning of record
Registrable Securities or any assignee of record of such Registrable Securities
in accordance with Section 1.14 hereof.
(b) The term "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"1933 Act"), and the declaration or ordering of effectiveness of such
registration statement or document.
(c) The term "Registrable Securities" means (i) Common Stock of the
Company issuable or issued upon conversion of the Series A Stock, Series B
Stock, Series C Stock and/or Series D Stock at any time outstanding and (ii) any
Common Stock of the Company issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued as) a dividend
or other distribution with respect to, or in exchange for, or in replacement of,
such Series A Stock, Series B Stock, Series C Stock, Series D Stock or Common
Stock; provided, however, that shares of Common Stock shall no longer be treated
as Registrable Securities when (x) a registration statement covering such
Registrable Securities has been declared effective and such Registrable
Securities have been disposed of pursuant to such effective registration
statement, (y) such Registrable Securities are sold by a person in a transaction
in which the rights under this Section 1 are not assigned in accordance with
Section 1.14 hereof or (z) the Holder of such Registrable Securities is able to
dispose of all Registrable Securities held by such Holder in one three-month
period pursuant to Rule 144 (or any similar provision then in force) under the
1933 Act without registration under the 1933 Act.
(d) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding that are, and the number of shares of Common Stock issuable pursuant
to
PAGE 2
<PAGE> 6
then exercisable or convertible securities that upon issuance would be,
Registrable Securities.
(e) The term "Form S-3" means such form under the 1933 Act as in
effect on the date hereof or any successor registration form under the 1933 Act
subsequently adopted by the SEC.
(f) The term "SEC" means the Securities and Exchange Commission.
(g) The term "1933 Act" means the Securities Act of 1933, as
amended.
1.2 REQUEST FOR REGISTRATION
(a) If the Company shall receive at any time after the earlier of
(i) three years from the date of this Agreement or (ii) six (6) months after the
effective date of the first registration statement for a public offering of
securities of the Company to the general public, a written request from (x) the
Holders of at least fifty percent (50%) of the Registrable Securities then
outstanding or (y) the holders of at least fifty percent (50%) of the combined
total number of shares of Series C Stock and Series D Stock then outstanding,
that the Company file a registration statement under the Act in which the
aggregate proceeds are in excess of $7,500,000, then the Company shall, within
twenty (20) days of the receipt thereof, give written notice of such request to
all Holders and shall, subject to the limitations of subsection 1.2(b), effect
as soon as practicable, and in any event shall use its best efforts to effect
within one hundred twenty (120) days of the receipt of such request, the
registration under the 1933 Act of all Registrable Securities that the Holders
request to be registered within twenty (20) days of the mailing of such notice
by the Company.
(b) If the Holders initiating the registration request hereunder
("Initiating Holders") intend to distribute the Registrable Securities covered
by their request by means of an underwriting, they shall so advise the Company
as a part of their request made pursuant to this Section 1.2 and the Company
shall include such information in the written notice referred to in subsection
1.2(a). The underwriter will be selected by the Company and shall be reasonably
acceptable to the Initiating Holders. In such event, the right of any Holder to
include its Registrable Securities in such registration shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent provided
herein. All Holders proposing to distribute their securities through such
underwriting shall (together with the Company) enter into an underwriting
agreement in customary form with the underwriter or underwriters selected for
such underwriting by the Company.
PAGE 3
<PAGE> 7
Notwithstanding any other provision of this Section 1.2, if the
underwriter advises the Initiating Holders in writing that marketing factors
require a limitation of the number of shares to be underwritten, then the
Initiating Holders shall so advise all Holders of Registrable Securities that
would otherwise be underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the underwriting shall be
allocated among all such Holders, including the Initiating Holders, in
proportion (as nearly as practicable) to the amount of Registrable Securities of
the Company owned by each Holder; provided, however, that the number of shares
of Registrable Securities to be included in such underwriting shall not be
reduced unless all other securities, including any shares offered by the
Company, are first entirely excluded from the underwriting. To facilitate the
allocation of shares in accordance with the above provisions, the Company may
round the number of shares allocated to any Holder to the nearest 100 shares.
(c) The Company is obligated to effect only two (2) such
registrations pursuant to this Section 1.2 (counting for this purpose only
registrations that have been declared or ordered effective and pursuant to which
Registrable Securities have been sold and registrations that have been withdrawn
by the Holders as to which the Holders have not elected to bear the expenses of
such registration pursuant to Section 1.6 and would, absent such election, have
been required to bear such expenses), one of which shall only be initiated if
requested by the holders of at least fifty percent (50%) of the combined total
number of shares of Series C Stock and Series D Stock then outstanding pursuant
to Section 1.2(a).
(d) Notwithstanding the foregoing (i) the Company shall not be
obligated to effect a registration pursuant to this Section 1.2 during the
period starting with the date 60 days prior to the Company's good faith
estimated date of filing of, and ending on the date 120 days following the
effective date of, a registration statement pertaining to an underwritten public
offering of securities for the account of the Company, provided the Company is
at all times during such period diligently pursuing such registration, (ii) the
Company shall not be obligated to effect a registration pursuant to this Section
1.2 with respect to any Registrable Securities that are, at the time of the
request for such registration, freely transferable under the provisions of Rule
144(k) promulgated under the 1933 Act, and (iii) if the Company shall furnish to
Holders requesting a registration statement pursuant to this Section 1.2 a
certificate signed by the President of the Company stating that, in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its shareholders for such registration statement
to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer taking action
with respect to such filing for a period of not more than ninety (90) days after
receipt of the request of the Initiating Holders;
PAGE 4
<PAGE> 8
provided, however, that this right to delay any requested registration shall not
be utilized more than twice (for a total of up to 120 days) in any 12-month
period.
1.3 COMPANY REGISTRATION
If (but without any obligation to do so) the Company proposes to
register (including for this purpose a registration effected by the Company for
shareholders other than the Holders) any of its stock or other securities under
the 1933 Act in connection with the public offering of such securities solely
for cash (other than a registration relating solely to the sale of securities to
participants in a Company employee stock plan, or a registration on any form
that does not include substantially the same information as would be required to
be included in a registration statement covering the sale of the Registrable
Securities), the Company shall, at such time, promptly give each Holder written
notice of such registration. Upon the written request of each Holder given
within twenty (20) days after the mailing of such notice by the Company, the
Company shall, subject to the provisions of Section 1.8, use its best efforts to
cause to be registered under the 1933 Act all of the Registrable Securities that
each such Holder has requested to be registered. If the registration of which
the Company gives notice is for a registered public offering involving an
underwriting, the Company shall so advise the Holders as part of the written
notice given pursuant to this Section 1.3. The Holders' rights under this
Section 1.3 may be exercised an unlimited number of times.
1.4 OBLIGATIONS OF THE COMPANY
Whenever required under this Section 1 to effect the registration of any
Registrable Securities, the Company shall, as expeditiously as reasonably
possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for up to one hundred twenty (120) days.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
1933 Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
1933
PAGE 5
<PAGE> 9
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by the Holders;
provided, however, that the Company shall not be required to effect a
registration or qualification in any particular jurisdiction in which the
Company would be required, in connection with such registration or qualification
or as a condition thereto, to qualify to do business or to file a general
consent to service of process, unless the Company is already so qualified to do
business or subject to service in such jurisdiction.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act, of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing, and, at the
request of any such Holder, prepare a supplement or amendment to such prospectus
so that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus will not contain any untrue statement of a material
fact or omit to state any material fact necessary to make the statements therein
not misleading.
(g) Furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Section 1, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Section 1, if such securities are being
sold through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated such date, from
the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in
PAGE 6
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an underwritten public offering, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities.
1.5 FURNISH INFORMATION
It shall be a condition precedent to the obligations of the Company to
take any action pursuant to this Section 1 with respect to the Registrable
Securities of any selling Holder, that such Holder shall furnish to the Company
such information regarding it, the Registrable Securities held by it, and the
intended method of disposition of such securities as shall be required to effect
the registration of such Holder's Registrable Securities and to execute such
documents in connection with such registration as the Company may reasonably
request.
1.6 EXPENSES OF DEMAND REGISTRATION
All expenses (other than underwriting discounts, commissions and stock
transfer taxes relating to Registrable Securities) incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including,
without limitation, all registration, filing and qualification fees, printers
and accounting fees, and fees and disbursements of counsel for the Company and
of one special counsel for all the selling Holders (which counsel shall be
selected by the Holders and shall be reasonably acceptable to the Company),
shall be borne by the Company; provided, however, that the Company shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to Section 1.2 if the registration request is subsequently withdrawn at the
request of the Holders of a majority of the Registrable Securities to be
registered (in which case all participating Holders shall bear such expenses),
unless the Holders of a majority of the Registrable Securities agree to forfeit
their right to one demand registration pursuant to Section 1.2; provided
further, however, that if at the time of such withdrawal, the Holders have
learned of a material adverse change in the condition, business, or prospects of
the Company from that known to the Holders at the time of their request and have
withdrawn the request with reasonable promptness following disclosure by the
Company of such material adverse change, then the Holders shall not be required
to pay any of such expenses otherwise payable by the Company and shall retain
their rights pursuant to Section 1.2.
PAGE 7
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1.7 EXPENSES OF COMPANY REGISTRATION
All expenses (other than underwriting discounts, commissions and stock
transfer taxes relating to Registrable Securities) incurred in connection with
registrations, filings or qualifications pursuant to Section 1.3 and Section
1.12, including, without limitation, all registration, filing, and qualification
fees, printers and accounting fees, and fees and disbursements of counsel for
the Company and of one special counsel for all the selling Holders (which
counsel shall be selected by the Holders and shall be reasonably acceptable to
the Company), shall be borne by the Company.
1.8 UNDERWRITING REQUIREMENTS
In connection with any offering involving an underwriting of shares of
capital stock pursuant to Section 1.3, the Company shall not be required under
Section 1.3 to include any of the Holders' securities in such underwriting
unless such Holders accept the terms of the underwriting as agreed upon between
the Company and the underwriters selected by it (or by other persons entitled to
select the underwriters). If the total amount of securities, including
Registrable Securities, requested by shareholders to be included in such
offering exceeds the amount of securities sold other than by the Company that
the underwriters reasonably believe is compatible with the success of the
offering, then the underwriters, in their sole discretion, may exclude up to a
maximum of (i) in a registration relating to an initial underwritten firm
commitment public offering of the Company for its own account, 100% of the
Registrable Securities so requested to be included in such registration, and
(ii) in any other registration, 75% of the Registrable Securities so requested
to be included in such registration (the securities so included to be
apportioned pro rata among the selling Holders according to the total amount of
securities entitled to be included therein owned by each selling Holder or in
such other proportion as shall mutually be agreed to by such selling Holders).
The Company shall advise all Holders of Registrable Securities which would
otherwise be registered and underwritten pursuant hereto of any such limitations
and the number of shares of Registrable Securities that may be included in the
registration. To facilitate the allocation of shares in accordance with the
above provisions, the Company may round the number of shares allocated to any
Holder to the nearest 100 shares.
1.9 DELAY OF REGISTRATION
No Holder shall have any right to obtain or seek an injunction
restraining or otherwise delaying any registration as the result of any
controversy that might arise with respect to the interpretation or
implementation of this Section 1.
PAGE 8
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1.10 INDEMNIFICATION
In the event any Registrable Securities are included in a registration
statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the partners, officers and directors of each Holder,
any underwriter (as defined in the 1933 Act) for such Holder and each person, if
any, who controls such Holder or underwriter within the meaning of the 1933 Act
or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against any
losses, claims, damages, or liabilities (joint or several) to which they may
become subject under the 1933 Act, the 1934 Act or other federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or (iii) any violation or alleged
violation by the Company of the 1933 Act, the 1934 Act, any state securities law
or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any
state securities law in connection with such registration and sale of
securities; and the Company will pay to each such Holder, partner, officer,
director, underwriter or controlling person, as incurred, any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this subsection 1.10(a) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the Company be
liable in any such case for any such loss, claim, damage, liability, or action
to the extent that it arises out of or is based upon a Violation that occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by any such Holder, partner, officer,
director, underwriter or controlling person or their respective agents.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the 1933 Act, each agent and any
underwriter, any other Holder selling securities in such registration statement
and any officer, director, or controlling person of any such underwriter or
other Holder, against any losses,
PAGE 9
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claims, damages, or liabilities (joint or several) to which any of the foregoing
persons may become subject, under the 1933 Act, the 1934 Act or other federal or
state law, insofar as such losses, claims, damages, or liabilities (or actions
in respect thereto) arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in reliance
upon and in conformity with written information furnished by such Holder or its
agents expressly for use in connection with such registration; and each such
Holder will pay, as incurred, any legal or other expenses reasonably incurred by
any person intended to be indemnified pursuant to this subsection 1.10(b), in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this subsection 1.10(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Holder (which consent shall not be unreasonably
withheld); and, provided further, that in no event shall any indemnity under
this subsection 1.10(b) exceed the net proceeds from the offering received by
such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.10, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties that may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with reasonable fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.10, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.10.
(d) To the extent the indemnification provided for in this Section
1.10 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any losses, claims, damages or liabilities
referred to herein, the indemnifying party, in lieu of indemnifying such
indemnified party
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hereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other, in connection with the Violation(s) that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by a court of law by reference to, among
other things, whether the untrue or allegedly untrue statement of a material
fact or the omission to state a material fact relates to information supplied by
the indemnifying party or by the indemnified party and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
(e) The obligations of the Company and Holders under this Section
1.10 shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1, and otherwise.
1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934
With a view to making available to the Holders the benefits of Rule 144
promulgated under the 1933 Act and any other rule or regulation of the SEC that
may at any time permit a Holder to sell securities of the Company to the public
without registration or pursuant to a registration on Form S-3, the Company
agrees to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) take such action, including the voluntary registration of its
Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities, such
action to be taken as soon as practicable after the end of the fiscal year in
which the first registration statement filed by the Company for the offering of
its securities to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act; and
(d) furnish to any Holder forthwith upon request, so long as the
Holder owns any Registrable Securities, (i) a written statement by the Company
that it has complied with the reporting requirements of SEC Rule 144 (at any
time after ninety (90) days after the effective date of the first registration
statement filed by the
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<PAGE> 15
Company), the 1933 Act and the 1934 Act (at any time after it has become subject
to such reporting requirements), or that it qualifies as a registrant whose
securities may be resold pursuant to Form S-3 (at any time after it so
qualifies), (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested in availing any Holder of
any rule or regulation of the SEC that permits the selling of any such
securities without registration or pursuant to such form.
1.12 FORM S-3 REGISTRATION
In the event that the Company receives a written request from the
Holders of at least thirty percent (30%) of the Registrable Securities then
outstanding, that the Company effect a registration on Form S-3 and any related
qualification or compliance with respect to all or a part of the Registrable
Securities owned by such Holders, the Company will:
(a) promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holders'
Registrable Securities as are specified in each such request, together with all
or such portion of the Registrable Securities of any other Holders joining in
such request as are specified in a written request given within twenty (20) days
after receipt of such written notice from the Company; provided, however, that
the Company shall not be obligated to effect any such registration,
qualification or compliance, pursuant to this Section 1.12 (i) if Form S-3 is
not available for such offering by the Holders; (ii) if the anticipated
aggregate offering price of the Registrable Securities to be registered (before
deductions for underwriters' discounts and commissions) does not exceed
$1,000,000; (iii) if the Company shall have effected a registration under this
Section 1.12 within the 12-month period preceding such request for registration
under this Section 1.12; or (iv) if the Company shall furnish to the Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its shareholders for such Form S-3 Registration
to be effected at such time, in which event the Company shall have the right to
defer the filing of the Form S-3 registration statement for a period of not more
than ninety (90) days after receipt of the request of the Holders under this
Section 1.12; provided, however, that the Company shall not utilize this right
to delay any requested registration more than twice (for a total of up to 120
days) in any 12-month period.
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(c) Subject to the foregoing, the Company shall file a Form S-3
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. Registrations effected pursuant to this
Section 1.12 shall not be counted as demands for registration or registrations
effected pursuant to Sections 1.2 or 1.3, respectively.
1.13 "MARKET STAND-OFF" AGREEMENT
Each Holder hereby agrees that, during the period specified by the
Company and an underwriter of common stock or other securities of the Company
(such period not to exceed 180 days), following the effective date of a
registration statement of the Company filed under the 1933 Act, it shall not, to
the extent requested by the Company and such underwriter, directly or indirectly
sell, offer to sell, contract to sell, grant any option to purchase or otherwise
transfer or dispose of (other than to donees who agree to be similarly bound)
any securities of the Company held by it at any time during such period except
Common Stock (i) included in such registration, (ii) acquired pursuant to
Section 2.6 or (iii) acquired by holders of Series C Stock or Series D Stock in
the Public Offering or on the open market after the Public Offering (as such
term is defined in Section 2.11); provided, however, that all officers and
directors of the Company enter into similar agreements. In order to enforce the
foregoing covenant, the Company may impose stop-transfer instructions with
respect to the Registrable Securities of each Holder until the end of such
period.
1.14 ASSIGNMENT OF REGISTRATION RIGHTS
The rights to cause the Company to register Registrable Securities
pursuant to this Section 1 may be assigned by a Holder to a transferee or
assignee of such securities that, together with all affiliates (as such term is
defined in Rule 405 promulgated under the 1933 Act) of such transferee or
assignee, acquires at least 200,000 shares of Registrable Securities, 50,000
shares of Series C Stock (or Common Stock issued upon conversion of Series C
Stock) or 50,000 shares of Series D Stock (or Common Stock issued upon
conversion of Series D Stock) (in each case appropriately adjusted for any stock
dividend, stock split, or combination applicable to the Registrable Securities)
or, if less, all of Holder's Registrable Securities, and who assumes the
transferor's or assignor's obligations hereunder; provided the Company is,
within a reasonable time after such transfer, furnished with written notice of
the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; provided, further,
in each of the foregoing instances, that such assignment shall be effective only
if immediately following such transfer the further disposition of such
securities by the transferee or assignee is restricted under the 1933 Act; and,
provided further, that any of the following
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transfers shall not be subject to the foregoing limitations on the minimum
number of shares to be transferred: (i) a transfer to any partner or retired
partner of any Holder which is a partnership, (ii) a transfer to any family
member or trust for the benefit of any individual Holder, (iii) a transfer to
any shareholder of any Holder which is a corporation, or (iv) a transfer to any
member of any Holder which is a limited liability company.
1.15 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS
From and after the date of this Agreement, the Company shall not,
without (a) the prior written consent of the Holders of a majority of the
outstanding Registrable Securities and (b) the prior written consent of the
holders of a majority of the combined total number of outstanding shares of
Series C Stock and Series D Stock, enter into any agreement with any holder or
prospective holder of any securities of the Company which would allow such
holder or prospective holder to (x) include such securities in any registration
filed under Section 1.2, 1.3 or 1.12, unless under the terms of such agreement
such holder or prospective holder may include such securities in any such
registration only to the extent that the inclusion of its securities will not
reduce the amount of the Registrable Securities of the Holders which is included
or (y) make a demand registration which could result in such registration
statement being declared effective prior to the earlier of either of the dates
set forth in Section 1.2(a) or within 120 days of the effective date of any
registration effected pursuant to Section 1.2.
1.16 TERMINATION
The registration rights described in this Section 1 shall terminate five
years from the effective date of the Company's first registration statement for
a firm commitment, underwritten public offering of securities of the Company to
the general public.
SECTION 2. COVENANTS OF THE COMPANY
2.1 DELIVERY OF ANNUAL FINANCIAL STATEMENTS AND OTHER INFORMATION
The Company shall deliver to the Investors and the transferees or
assignees thereof, provided that such Investor, transferee or assignee and the
affiliates (as such term is defined in Rule 405 promulgated under the 1933 Act)
of or entities under common investment management with such Investor, transferee
or assignee, as the case may be, hold in the aggregate at least 200,000 shares
of Series A Stock or Series B Stock or at least 50,000 shares of Series C Stock
or Series D Stock (in each case appropriately adjusted for stock dividends,
splits or combinations) (each, an "Interested Holder"):
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<PAGE> 18
(a) as soon as practicable, but in any event within 90 days after
the end of each fiscal year of the Company, an income statement, statement of
shareholders' equity and statement of cash flows for such fiscal year, and a
balance sheet of the Company as of the end of such year, such financial
statements to be prepared in accordance with generally accepted accounting
principles ("GAAP") and audited by independent certified public accountants of
nationally recognized standing selected by the Company; and
(b) as soon as practicable, but in any event prior to the end of
each fiscal year, a budget and business plan approved by the Board of Directors
for the next fiscal year and income and loss projections for the Company in
respect of such fiscal year, all prepared on a monthly basis, and promptly after
preparation thereof any other budgets or revised budgets prepared by the Company
and delivered to the Board of Directors; and
(c) such other information relating to the financial condition,
business, prospects or corporate affairs of the Company as any Interested Holder
may from time to time reasonably request.
2.2 DELIVERY OF INTERIM FINANCIAL STATEMENTS
The Company shall deliver to each Interested Holder:
(a) as soon as practicable, but in any event within 45 days after
the end of each fiscal quarter of the Company, an unaudited income statement and
balance sheet for and as of the end of such quarter and for the fiscal year to
date, in reasonable detail; and
(b) within 30 days after the end of each month, an unaudited income
statement and balance sheet for and as of the end of such month and for the
fiscal year to date, in reasonable detail.
2.3 INSPECTION
The Company shall permit each Interested Holder, at such party's
expense, to visit and inspect the Company's properties, to examine its books of
accounts and records and to discuss the Company's affairs, finances and accounts
with its officers, all at such reasonable times as may be requested by such
Interested Holder; provided, however, that the Company shall not be obligated
pursuant to this Section 2.3 to provide access to any information that it
reasonably considers to be a trade secret or similar confidential information
unless such Interested Holder provides reasonable assurances in writing that it
will maintain the confidentiality of the information.
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2.4 CONFIDENTIALITY
The information provided pursuant to Sections 2.1, 2.2 and 2.3 shall be
used by the Interested Holders solely in furtherance of their interests as
Interested Holders in the Company. Each Interested Holder agrees that it will
keep confidential and will not disclose or divulge any confidential, proprietary
or secret information which such Interested Holder may obtain from the Company,
pursuant to financial statements, reports and other materials submitted by the
Company as required hereunder or pursuant to visitation or inspection rights
granted hereunder or otherwise, unless such information is already known to the
Interested Holder or is or becomes publicly known (other than by means of the
Interested Holder in violation of this Section 2.4), or unless the Company gives
its written consent to the Interested Holder's release of such information,
except that no such written consent shall be required if such information is
only to be provided to the Interested Holder's lawyer or accountant, or to an
officer, director or partner of an Interested Holder, in furtherance of the
Interested Holder's interest in the Company and such other party shall have
agreed to keep such information confidential and to not further disclose or
divulge it.
2.5 RIGHT OF FIRST REFUSAL
Subject to the terms and conditions specified in this Section 2.5, the
Company hereby grants to each Interested Holder a right of first refusal with
respect to future sales by the Company of its Shares (as hereinafter defined).
Each time the Company proposes to offer any shares of, or securities convertible
into or exercisable for, any class or series of its capital stock ("Shares"),
the Company shall first make an offering of such Shares to the Interested
Holders in accordance with the following provisions:
(a) The Company shall deliver a notice ("Notice") to each Interested
Holder stating (i) its bona fide intention to offer or issue such Shares, (ii)
the number of such Shares to be offered, (iii) the price, if any, for which it
proposes to offer such Shares, and (iv) the names of proposed offerees, if
known.
(b) Within 20 calendar days after delivery of the Notice, each
Interested Holder may elect to purchase or obtain, at the price and on the terms
specified in the Notice, up to that portion of such Shares which equals the
proportion that the number of shares of Common Stock Equivalents (as hereinafter
defined) then held by the Interested Holder bears to the total number of shares
of Common Stock Equivalents then held by all shareholders of the Company.
"Common Stock Equivalents" means shares of (i) Common Stock then outstanding
plus (ii) Common Stock issuable upon conversion or exercise of all convertible
securities, options, warrants and other such rights then outstanding. If any
Interested Holder does not elect to purchase Shares to which such Interested
Holder is entitled under this Section 2.5(b), the other Interested Holders that
have elected to purchase Shares may purchase
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the non-purchasing Interested Holder's portion on a pro rata basis within 10
days from the date such non-purchasing Interested Holder fails to exercise its
right hereunder.
(c) If all such Shares referred to in the Notice are not elected to
be purchased as provided in subsection 2.5(b), the Company may, during the 90
day period following the expiration of the 20-day period provided in subsection
2.5(b) (or, if applicable, the 10-day period set forth in such subsection,
whichever expires later), offer the remaining unsubscribed Shares to any person
or persons at a price not less, and upon general terms no more favorable to the
offeree, than those specified in the Notice. If the Company does not enter into
an agreement for the sale of any such remaining Shares within such period, the
right provided hereunder shall be deemed to be revived and such Shares shall not
be offered unless first reoffered to the Interested Holders in accordance
herewith.
(d) The right of first refusal in this Section 2.5 shall not be
applicable to (i) the issuance of Shares on a pro rata basis to all of the
Company's shareholders in connection with any stock split, dividend, reverse
stock split or recapitalization, (ii) shares of Common Stock (and/or options,
warrants or other Common Stock purchase rights issued pursuant to such plans or
other arrangements) issued or to be issued to employees, officers or directors
of, or consultants or advisors to the Company or any subsidiary, pursuant to
stock purchase or stock option plans or other arrangements that are approved by
the Board of Directors, (iii) the issuance of up to (A) 2,171,128 shares of
Common Stock and (B) 200,000 shares of Series C Stock (in each case adjusted
appropriately for stock dividends, splits, combinations and similar
transactions) issued or issuable upon the exercise of warrants outstanding as of
the date hereof or hereafter, provided, however, with respect to such warrants
exercisable for Series C Stock, that the exercise price thereof is at least
$6.61 per share (adjusted appropriately for stock dividends, splits,
combinations and similar transactions), (iv) any Shares offered to the public
pursuant to a registration statement filed under the 1933 Act, (v) any Shares
issued for consideration other than cash pursuant to a merger, consolidation,
acquisition or similar business combination, (vi) shares of Common Stock issued
upon conversion of any Shares at any time outstanding, (vii) any Shares issued
pursuant to any equipment leasing arrangement or bank financing, (viii) Shares
issued in connection with strategic transactions involving the Company and other
entities, including (A) joint ventures, marketing or distribution arrangements
or (B) technology transfer or development arrangements other than those
primarily for capital raising purposes, provided that such strategic
transactions and the issuance of Shares in connection therewith have been
approved by the Company's Board of Directors, or (ix) the issuance of Series D
Stock pursuant to the Series D Stock Purchase Agreement.
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2.6 INITIAL PUBLIC OFFERING; RIGHT OF FIRST REFUSAL
(a) Notwithstanding the provisions of Section 2.5(d)(iv), each
Interested Holder that owns at least 50,000 shares of Series C Stock and/or
50,000 shares of Series D Stock (collectively, "Participating Holders") shall
have the right, subject to the other provisions of this Section 2.6, to purchase
shares of Common Stock at the price the shares are offered to the public in the
Public Offering. If a Participating Holder exercises its right of first refusal
in the Public Offering (the "IPO Purchase Option"), it shall have the right to
purchase a pro rata portion of the shares offered in the Public Offering which
equals the proportion that the number of shares of Common Stock Equivalents then
held by the Participating Holder bears to the total number of shares of Common
Stock Equivalents held by all securityholders of the Company. The Company shall
deliver notice of the Public Offering to each Participating Holder within 10
days following the filing of a registration statement relating to the Public
Offering. Such notice shall set forth the number of shares of Common Stock that
each Participating Holder shall have the right to purchase pursuant to this
Section 2.6 as well as the basis for the computation of such number. Within five
days following delivery of such notice, each Participating Holder may exercise
the IPO Purchase Option (by delivery of notice to such effect to the Company
within such five-day period) for a number of shares up to the maximum number set
forth in such notice. To the extent a Participating Holder does not exercise the
IPO Purchase Option for the total number of shares set forth in the notice
within such five-day period, the other Participating Holders that have elected
to purchase shares may purchase the non-purchasing Participating Holder's
portion on a pro rata basis within five days from the date such non-purchasing
Participating Holder fails to exercise its right hereunder. To the extent a
Participating Holder does not exercise its IPO Purchase Option within the time
period set forth in this Section 2.6, the Company shall have no further
obligation to such Participating Holder under this Section 2.6.
(b) Each Participating Holder's exercise of the IPO Purchase Option
shall be deemed an expression of interest in receiving an offer by the Company
to purchase the number of shares indicated in such Participating Holder's
notice. The Company's offer to sell such shares to the Participating Holders
shall be deemed to occur automatically upon the completion of the earlier to
occur of (i) the Company's providing each participating Participating Holder
with a copy of the final prospectus filed with the SEC with respect to the
Public Offering and (ii) two hours after the latest to occur of (A) notice to
such Participating Holder of the effectiveness of the Public Offering
registration statement and (B) notice to such Participating Holder of the
Company's determination of the offering price (the completion of the last to
occur of the foregoing, the "Offer Commencement"). Such Participating Holder
shall have an unconditional right to terminate its IPO Purchase Option and
revoke its exercise thereof by written notice to the Company on or before the
Offer Commencement.
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Once revoked by such Participating Holder, the IPO Purchase Option shall become
null and void.
(c) A Participating Holder's exercise of the IPO Purchase Option shall,
unless revoked on or before the Offer Commencement, automatically be deemed to
be a binding commitment to purchase the shares indicated by such Participating
Holder in its notice to the Company upon the Offer Commencement. Such
Participating Holder's purchase of the shares shall occur simultaneously with
the closing of the purchase and sale of the other shares distributed in the
Public Offering. It is the intent of the parties that any shares issued to such
Participating Holder shall be fully registered shares, offered and sold in the
Public Offering. Shares purchased by any Participating Holder pursuant to its
exercise of the IPO Purchase Option shall not be subject to the provisions of
Section 1.13 of this Agreement.
(d) The IPO Purchase Option shall be subject to compliance with all
applicable security laws, the rules and regulations promulgated thereunder, and
rules and regulations of the National Association of Securities Dealers, Inc. In
the event that the IPO Purchase Option is infeasible due to applicable
regulatory restrictions or prohibited by such laws, rules or regulations, then
the right of first refusal set forth in this Section 2.6, including the IPO
Purchase Option, shall not be available to the Participating Holders.
(e) Notwithstanding any other provision of this Section 2.6, if the
managing underwriter or underwriters of the Public Offering determine, in their
sole discretion, that marketing or other factors necessary to the successful
completion of the Public Offering require a limitation of the number of shares
that Participating Holders would otherwise be entitled to purchase in the Public
Offering pursuant to this Section 2.6, and the managing underwriter delivers
notice that reasonably sets forth such factors no later than five business days
prior to the anticipated effective date of the Public Offering registration
statement, then the underwriters may, in their sole discretion, exclude from the
IPO Purchase Option any or all of the shares that would otherwise be subject
thereto, and any shares that continue to be subject to the IPO Purchase Option
shall be allocated among all Participating Holders electing to exercise the IPO
Purchase Option in the same proportion (as nearly as practicable) as the number
of shares of Participating Stock held by each such Participating Holder.
2.7 LIFE INSURANCE
The Company agrees to maintain valid policies of workers' compensation
insurance and of insurance with respect to its properties and business of the
kinds and in the amounts not less than is customarily obtained by corporations
engaged in the same or similar business and similarly situated, including,
without limitation, insurance against loss, damage, fire, theft, public
liability and other risks. The
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Company agrees to maintain key-man life insurance policies, in the amount of at
least $2,000,000, on the life of Gregory L. Drew and in the amount of at least
$1,000,000 on the life of Frank Sadowski, respectively, so long as such
individual is an employee of the Company. The Company shall be the beneficiary
of such policies.
2.8 RESERVATION OF COMMON STOCK
The Company will at all times reserve and keep available, solely for
issuance and delivery upon the conversion of (a) Series A Stock, all shares of
Common Stock issuable from time to time upon such conversion, (b) Series B
Stock, all shares of Common Stock issuable from time to time upon such
conversion, (c) Series C Stock, all shares of Common Stock issuable from time to
time upon such conversion and (d) Series D Stock, all shares of Common Stock
issuable from time to time upon such conversion. The Company will at all times
reserve and keep available shares of Common Stock issuable upon exercise of the
Company's outstanding stock options.
2.9 ASSIGNMENT OF INVENTIONS AND CONFIDENTIALITY AGREEMENTS
The Company shall require all employees hired on or after the date
hereof to execute and deliver an Assignment of Inventions and Confidentiality
Agreement.
2.10 COMPENSATION COMMITTEE
The Company agrees to maintain a Compensation Committee of the Board of
Directors. The majority of the members of the Compensation Committee shall not
be employees of the Company. So long as Gregory L. Drew is a Director of the
Company, he shall be a member of the Compensation Committee.
2.11 TERMINATION OF COVENANTS
Except for the covenants set forth in Section 2.6, the covenants set
forth in this Section 2 shall terminate and be of no further force or effect
upon the earlier of:
(a) the closing of a firmly underwritten, public offering by the
Company of shares of Common Stock, registered under the 1933 Act, in which the
offering price per share is $5.00 or above and the aggregate offering proceeds
paid to the Company are in excess of $10,000,000 (before deduction of
underwriters' discounts and commissions and expenses of the offering) (a "Public
Offering"), or
(b) the date the Company first becomes subject to the periodic
reporting requirements of Section 15(d) of the 1934 Act.
The covenants set forth in Section 2.6 shall terminate and be of no
further force or effect immediately after the closing of the Public Offering.
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SECTION 3. MISCELLANEOUS
3.1 SUCCESSORS AND ASSIGNS
Except to the extent that the application of certain provisions of this
Agreement to transferees and assignees of the Series A Stock, the Series B
Stock, Series C Stock, Series D Stock and the Common Stock (including, without
limitation, Common Stock issuable upon conversion of the Series A Stock, Series
B Stock, Series C Stock or Series D Stock) is expressly limited, the terms and
conditions of this Agreement shall be freely assignable and shall inure to the
benefit of and be binding upon the respective successors and assigns of the
parties. Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors and
permitted assigns any rights, remedies, obligations or liabilities under or by
reason of this Agreement.
3.2 GOVERNING LAW
This Agreement shall be governed by and construed under the laws of the
State of Oregon as applied to agreements among Oregon residents entered into and
to be performed entirely within the State of Oregon.
3.3 COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, and all of which, together, shall constitute
one and the same instrument.
3.4 HEADINGS
The headings used in this Agreement are used for convenience only and
are not to be considered in construing or interpreting this Agreement.
3.5 NOTICES
Unless otherwise provided, any notice required or permitted under this
Agreement shall be given in writing and shall be deemed effectively given upon
personal delivery to the party to be notified or three days after deposit in the
United States Mail, postage prepaid, registered or certified with return receipt
requested and addressed to the party to be notified, if to the Company, at 1516
N.W. Thurman, Portland, Oregon 97209, or if to an Investor, at the address
indicated for such Investor on Schedule A hereto, or at such other address as
such party may designate by 10 days' advance written notice to the other parties
given in the foregoing manner. Copies of any notices sent to the holders of
Series D Stock shall also be sent to Rick Cohen, Esq. of Buchalter, Nemer,
Fields & Younger, 601 South Figueroa Street, Suite 2400, Los Angeles, California
90017.
PAGE 21
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3.6 AMENDMENTS AND WAIVERS
This Agreement may be amended and the observance of any term of this
Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively) only with the written consent of the Company and
the holders of a majority of the Common Stock Equivalents held by the Investors;
provided, however, that any amendment or modification that is detrimental to the
holders of Series C Stock or Series D Stock shall require the written consent of
the holders of a majority of the Series C Stock or Series D Stock, respectively,
then outstanding; and, provided further, that any amendment or modification that
is detrimental to a holder of Preferred Stock in a manner different from the
other holders of Preferred Stock shall require the written consent of such
holder.
3.7 SEVERABILITY
If one or more provisions of this Agreement is held to be unenforceable
under applicable law, such provision shall be excluded from this Agreement, and
the balance of this Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
3.8 ENTIRE AGREEMENT
This Agreement constitutes the full and entire understanding and
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements with respect to the subject matter hereof. This
Agreement amends and restates in its entirety the Second Amended and Restated
Investors' Rights Agreement dated as of October 19, 1999 between the Company and
the holders of Series A Stock, Series B Stock and Series C Stock.
3.9 ATTORNEYS' FEES
If any suit or action arising out of or related to this Agreement is
brought by any party, the prevailing party or parties shall be entitled to
recover the costs and fees (including, without limitation, reasonable attorney
fees, the fees and costs of experts and consultants, copying, courier and
telecommunication costs, and deposition costs and all other costs of discovery)
incurred by such party or parties in such suit or action, including, without
limitation, any post-trial or appellate proceeding.
[Remainder of this page intentionally left blank.]
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IN WITNESS WHEREOF, the parties have executed this Third Amended and
Restated Investors' Rights Agreement as of the date first above written.
800.COM, INC.
By:
--------------------------------------
Name: Gregory L. Drew
Title: President
INVESTORS:
OLYMPIC VENTURE PARTNERS IV, L.P.
By: OVMC IV, LLC, its General Partner
By:
--------------------------------------
Gerard H. Langeler
Managing Member
OVP IV ENTREPRENEURS FUND
By: OVMC IV, LLC, its General Partner
By:
--------------------------------------
Gerard H. Langeler
Managing Member
PAGE S-1
<PAGE> 27
CB (BERKMAN) CAPITAL LLC
By: CRAIG BERKMAN & ASSOCIATES, INC.
its Managing Member
By:
--------------------------------------
Craig L. Berkman
President
DAIN RAUSCHER WESSELS INVESTORS LLC
By:
--------------------------------------
Name:
Title:
------------------------------------------
Robert J. Reynolds
------------------------------------------
Mitchell P. Bartlett
------------------------------------------
Gene Carletta
------------------------------------------
Joseph Pacella
------------------------------------------
John Ripper
PAGE S-2
<PAGE> 28
D.A. DAVIDSON & CO., CUSTODIAN FBO
SPENCER J. BROWN IRA
By:
--------------------------------------
Name:
Title:
D.A. DAVIDSON & CO., CUSTODIAN FBO
RICKEY J. PETRY IRA
By:
--------------------------------------
Name:
Title:
------------------------------------------
Laurence H. Baker
------------------------------------------
Steve Weiss
TWB INVESTMENT PARTNERSHIP
By:
--------------------------------------
Name:
Title:
PAGE S-3
<PAGE> 29
THE CHRIS KOCHER REVOCABLE LIVING
TRUST DTD. 12/15/90
By:
--------------------------------------
Chris Kocher
Trustee
------------------------------------------
Saul Gamoran
------------------------------------------
Richard Galanti
LAZARUS FAMILY INVESTMENTS, LLC
By:
--------------------------------------
Jonathan D. Lazarus, Manager
TRINITY VENTURES VI, L.P.
By: TRINITY TVL PARTNERS VI, LLC,
its General Partner
By:
--------------------------------------
James G. Shennan, Jr.
Manager
PAGE S-4
<PAGE> 30
TRINITY VI SIDE-BY-SIDE FUND, L.P.
By: TRINITY TVL PARTNERS VI, LLC,
its General Partner
By:
--------------------------------------
James G. Shennan, Jr.
Manager
APV TECHNOLOGY PARTNERS II, L.P.
By: APV MANAGEMENT CO. II, LLC,
its Managing General Partner
By:
--------------------------------------
Name:
Title: Managing Member
APV TECHNOLOGY PARTNERS, L.P.
By: APV MANAGEMENT CO., LLC,
its Managing General Partner
By:
--------------------------------------
Name:
Title: Managing Member
APV TECHNOLOGY PARTNERS U.S., L.P.
By: APV MANAGEMENT CO., LLC,
its Managing General Partner
By:
--------------------------------------
Name:
Title: Managing Member
PAGE S-5
<PAGE> 31
HGI VENTURES, LLC
By:
--------------------------------------
Name:
Title:
WPS, LLC
By:
--------------------------------------
Name:
Title: Managing Member
VULCAN VENTURES INCORPORATED
By:
--------------------------------------
William D. Savoy
Vice President
STANFORD UNIVERSITY
By:
--------------------------------------
Name:
Title:
PAGE S-6
<PAGE> 32
ATGF II
By:
--------------------------------------
Name:
Title:
VERTEX CAPITAL II LLC
By:
--------------------------------------
Name:
Title:
------------------------------------------
James Stableford
LITTON MASTER TRUST
By Amerindo Investment Advisors Inc.
its Attorney-in-Fact
By:
----------------------------------
Name:
Title:
------------------------------------------
Timothy Zuckert
Q INVESTMENT PARTNERS LLC
By:
------------------------------------------
William Bryant
PAGE S-7
<PAGE> 33
ATTRACTOR OFFSHORE LTD.
By:
--------------------------------------
Name: Harvey Allison
Title: President of Attractor Investment
Management, its Investment Manager
ATTRACTOR INSTITUTIONAL LP
By:
--------------------------------------
Name: Harvey Allison
Title: Managing Member of Attractor
Ventures LLC, General Partner of
Attractor Institutional LP
ATTRACTOR VENTURES LLC
By:
--------------------------------------
Name: Harvey Allison
Title: Managing Member
ATTRACTOR LP
By:
--------------------------------------
Name: Harvey Allison
Title: Managing Member of Attractor
Ventures LLC, General Partner of
Attractor LP
ATTRACTOR QP LP
By:
--------------------------------------
Name: Harvey Allison
Title: Managing Member of Attractor
Ventures LLC, General Partner of
Attractor QP LP
PAGE S-8
<PAGE> 34
BEIJING TECHNOLOGY DEVELOPMENT FUND, LDC
By:
--------------------------------------
Name:
Title:
INTERNATIONAL NETWORK CAPITAL CORP.
By:
--------------------------------------
Name:
Title:
INTERNATIONAL NETWORK CAPITAL, LDC
By:
--------------------------------------
Name:
Title:
TEAM HUNTER LLC
By:
--------------------------------------
Name:
Title:
PAGE S-9
<PAGE> 35
SOFINOV, SOCIETE FINANCIERE
D'INNOVATION INC.
By:
--------------------------------------
Denis Dionne
President
By:
--------------------------------------
Pierre Pharand
Vice President
DIGITAL MEDIA & COMMUNICATIONS II LIMITED
PARTNERSHIP
By: Advent International Limited
Partnership, General Partner
By: Advent International Corporation,
General Partner
By:
--------------------------------------
Name:
Vice President/Senior Vice President
ADVENT CROWN FUND II C.V.
By: Advent International Limited
Partnership, General Partner
By: Advent International Corporation,
General Partner
By:
--------------------------------------
Name:
Vice President/Senior Vice President
OAKSTONE VENTURES LIMITED PARTNERSHIP
By: Advent International Limited
Partnership, General Partner
By: Advent International Corporation,
General Partner
By:
--------------------------------------
Name:
Vice President/Senior Vice President
PAGE S-10
<PAGE> 36
ADVENT PARTNERS LIMITED PARTNERSHIP
By: Advent International Corporation,
General Partner
By:
--------------------------------------
Name:
Vice President/Senior Vice President
LEVRICK LIMITED
By:
--------------------------------------
Nigel Hill
Director
PORTAGE FOUNDERS L.P.
By: Portage Venture Partners, LLC, its
General Partner
By:
--------------------------------------
Judith Bultman Meyer
Managing Director
------------------------------------------
Maureen Moore
CB (BERKMAN) CAPITAL II LLC
By: CRAIG BERKMAN & ASSOCIATES, INC.
its Managing Member
By:
--------------------------------------
Craig L. Berkman
President
PAGE S-11
<PAGE> 37
WI HARPER GROUP
By:
--------------------------------------
Name:
Title:
OLYMPIC VENTURE PARTNERS V, L.P.
By: OVMC V, L.L.C., its General Partner
By:
--------------------------------------
Gerard H. Langeler
Managing Member
PAGE S-12
<PAGE> 38
[SERIES D SHAREHOLDERS]
PAGE S-13
<PAGE> 1
EXHIBIT 10.2
800.COM, INC.
1998 STOCK OPTION PLAN
SECTION 1. PURPOSE
The purpose of the 800.COM, INC. 1998 Stock Option Plan (the "Plan") is
to enhance the long-term shareholder value of 800.COM, INC., an Oregon
corporation (the "Company"), by offering opportunities to key employees,
directors, officers, consultants, agents, advisors and independent contractors
of the Company and its Subsidiaries (as defined in Section 2) to participate in
the Company's growth and success, and to encourage them to remain in the service
of the Company and its Subsidiaries and to acquire and maintain stock ownership
in the Company.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set
forth below:
2.1 BOARD
"Board" means the Board of Directors of the Company.
2.2 CAUSE
"Cause" means dishonesty, fraud, misconduct, unauthorized use or
disclosure of confidential information or trade secrets, or conviction or
confession of a crime punishable by law (except minor violations), in each case
as determined by the Plan Administrator, and its determination shall be
conclusive and binding.
2.3 CODE
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.4 COMMON STOCK
"Common Stock" means the common stock, without par value, of the
Company.
2.5 CORPORATE TRANSACTION
"Corporate Transaction" means any of the following events:
(a) Consummation of any merger or consolidation of the Company,
if following such merger or consolidation the holders of the Company's
outstanding voting
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<PAGE> 2
securities immediately prior to such merger or consolidation own less
than 51% of the outstanding voting securities of the surviving
corporation;
(b) Consummation of any sale, lease, exchange or other transfer
in one transaction or a series of related transactions of all or
substantially all of the Company's assets other than a transfer of the
Company's assets to a majority-owned subsidiary corporation (as the term
"subsidiary corporation" is defined in Section 8.3) of the Company; or
(c) Approval by the holders of the Common Stock of any plan or
proposal for the liquidation or dissolution of the Company.
Ownership of voting securities shall take into account and shall include
ownership as determined by applying Rule 13d-3(d)(1)(i) (as in effect on the
date of adoption of the Plan) under the Exchange Act.
2.6 DISABILITY
"Disability" means "disability" as that term is defined for purposes of
the Company's long-term disability plan or other similar successor plan
applicable to salaried employees.
2.7 EARLY RETIREMENT
"Early Retirement" means early retirement as that term is defined by the
Plan Administrator from time to time for purposes of the Plan.
2.8 EXCHANGE ACT
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.9 FAIR MARKET VALUE
The "Fair Market Value" shall be as established in good faith by the
Plan Administrator or (a) if the Common Stock is listed on the Nasdaq National
Market, the average of the high and low per share sales prices for the Common
Stock as reported by the Nasdaq National Market for a single trading day or (b)
if the Common Stock is listed on the New York Stock Exchange or the American
Stock Exchange, the average of the high and low per share sales prices for the
Common Stock as such price is officially quoted in the composite tape of
transactions on such exchange for a single trading day. If there is no such
reported price for the Common Stock for the date in question, then such price on
the last preceding date for which such price exists shall be determinative of
the Fair Market Value.
2.10 GOOD REASON
"Good Reason" means the occurrence of any of the following events or
conditions and the failure of the Successor Corporation to cure such event or
condition within 30 days after receipt of written notice by the Optionee:
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<PAGE> 3
(a) a change in the Optionee's status, title, position or
responsibilities (including reporting responsibilities) that, in the Optionee's
reasonable judgment, represents a substantial reduction in the status, title,
position or responsibilities as in effect immediately prior thereto; the
assignment to the Optionee of any duties or responsibilities that, in the
Optionee's reasonable judgment, are materially inconsistent with such status,
title, position or responsibilities; or any removal of the Optionee from or
failure to reappoint or reelect the Optionee to any of such positions, except in
connection with the termination of the Optionee's employment for Cause, for
Disability or as a result of his or her death, or by the Optionee other than for
Good Reason;
(b) a reduction in the Optionee's annual base salary;
(c) the Successor Corporation's requiring the Optionee (without
the Optionee's consent) to be based at any place outside a 35-mile radius of his
or her place of employment prior to a Corporate Transaction, except for
reasonably required travel on the Successor Corporation's business that is not
materially greater than such travel requirements prior to the Corporate
Transaction;
(d) the Successor Corporation's failure to (i) continue in
effect any material compensation or benefit plan (or the substantial equivalent
thereof) in which the Optionee was participating at the time of a Corporate
Transaction, including, but not limited to, the Plan, or (ii) provide the
Optionee with compensation and benefits substantially equivalent (in terms of
benefit levels and/or reward opportunities) to those provided for under each
material employee benefit plan, program and practice as in effect immediately
prior to the Corporate Transaction;
(e) any material breach by the Successor Corporation of its
obligations to the Optionee under the Plan or any substantially equivalent plan
of the Successor Corporation; or
(f) any purported termination of the Optionee's employment or
services for Cause by the Successor Corporation that does not comply with the
terms of the Plan or any substantially equivalent plan of the Successor
Corporation.
2.11 GRANT DATE
"Grant Date" means the date the Plan Administrator adopted the granting
resolution or a later date designated in a resolution of the Plan Administrator
as the date an Option is to be granted.
2.12 INCENTIVE STOCK OPTION
"Incentive Stock Option" means an Option to purchase Common Stock
granted under Section 7 with the intention that it qualify as an "incentive
stock option" as that term is defined in Section 422 of the Code.
2.13 NONQUALIFIED STOCK OPTION
"Nonqualified Stock Option" means an Option to purchase Common Stock
granted under Section 7 other than an Incentive Stock Option.
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<PAGE> 4
2.14 OPTION
"Option" means the right to purchase Common Stock granted under Section
7.
2.15 OPTIONEE
"Optionee" means (i) the person to whom an Option is granted; (ii) for
an Optionee who has died, the personal representative of the Optionee's estate,
the person(s) to whom the Optionee's rights under the Option have passed by will
or by the applicable laws of descent and distribution, or the beneficiary
designated in accordance with Section 9; or (iii) person(s) to whom an Option
has been transferred in accordance with Section 9.
2.16 PLAN ADMINISTRATOR
"Plan Administrator" means the Board or any committee of the Board
designated to administer the Plan under Section 3.1.
2.17 RETIREMENT
"Retirement" means retirement as of the individual's normal retirement
date as that term is defined by the Plan Administrator from time to time for
purposes of the Plan.
2.18 SECURITIES ACT
"Securities Act" means the Securities Act of 1933, as amended.
2.19 SUBSIDIARY
"Subsidiary," except as provided in Section 8.3 in connection with
Incentive Stock Options, means any entity that is directly or indirectly
controlled by the Company or in which the Company has a significant ownership
interest, as determined by the Plan Administrator, and any entity that may
become a direct or indirect parent of the Company.
2.20 SUCCESSOR CORPORATION
"Successor Corporation" has the meaning set forth under Section 10.2.
SECTION 3. ADMINISTRATION
3.1 PLAN ADMINISTRATOR
The Plan shall be administered by the Board or a committee or committees
(which term includes subcommittees) appointed by, and consisting of two or more
members of, the Board. If and so long as the Common Stock is registered under
Section 12(b) or 12(g) of the Exchange Act, the Board shall consider in
selecting the Plan Administrator and the membership of any committee acting as
Plan Administrator, with respect to any persons subject or likely to become
subject to Section 16 of the Exchange Act, the provisions regarding (a) "outside
directors" as contemplated by Section 162(m) of the Code and (b) "nonemployee
directors" as contemplated by
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<PAGE> 5
Rule 16b-3 under the Exchange Act. The Board may delegate the responsibility for
administering the Plan with respect to designated classes of eligible persons to
different committees consisting of two or more members of the Board, subject to
such limitations as the Board deems appropriate. Committee members shall serve
for such term as the Board may determine, subject to removal by the Board at any
time.
3.2 ADMINISTRATION AND INTERPRETATION BY THE PLAN ADMINISTRATOR
Except for the terms and conditions explicitly set forth in the Plan,
the Plan Administrator shall have exclusive authority, in its discretion, to
determine all matters relating to Options under the Plan, including the
selection of individuals to be granted Options, the type of Options, the number
of shares of Common Stock subject to an Option, all terms, conditions,
restrictions and limitations, if any, of an Option and the terms of any
instrument that evidences the Option. The Plan Administrator shall also have
exclusive authority to interpret the Plan and may from time to time adopt, and
change, rules and regulations of general application for the Plan's
administration. The Plan Administrator's interpretation of the Plan and its
rules and regulations, and all actions taken and determinations made by the Plan
Administrator pursuant to the Plan, shall be conclusive and binding on all
parties involved or affected. The Plan Administrator may delegate administrative
duties to such of the Company's officers as it so determines.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 AUTHORIZED NUMBER OF SHARES
Subject to adjustment from time to time as provided in Section 10.1, a
maximum of 3,478,568 shares of Common Stock shall be available for issuance
under the Plan. Shares issued under the Plan shall be drawn from authorized and
unissued shares.
4.2 REUSE OF SHARES
Any shares of Common Stock that have been made subject to an Option that
cease to be subject to the Option (other than by reason of exercise of the
Option to the extent it is exercised for shares) shall again be available for
issuance in connection with future grants of Options under the Plan.
SECTION 5. ELIGIBILITY
Options may be granted under the Plan to those officers, directors and
key employees of the Company and its Subsidiaries as the Plan Administrator from
time to time selects. Options may also be made to consultants, agents, advisors
and independent contractors who provide services to the Company and its
Subsidiaries.
PAGE 5
<PAGE> 6
SECTION 6. AWARDS
6.1 FORM AND GRANT OF OPTIONS
The Plan Administrator shall have the authority, in its sole discretion,
to determine the type or types of awards to be made under the Plan. Such awards
may consist of Incentive Stock Options and/or Nonqualified Stock Options.
Options may be granted singly or in combination.
6.2 ACQUIRED COMPANY OPTION AWARDS
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator may grant Options under the Plan in substitution for awards issued
under other plans, or assume under the Plan awards issued under other plans, if
the other plans are or were plans of other acquired entities ("Acquired
Entities") (or the parent of the Acquired Entity) and the new Option is
substituted, or the old award is assumed, by reason of a merger, consolidation,
acquisition of property or of stock, reorganization or liquidation (the
"Acquisition Transaction"). In the event that a written agreement pursuant to
which the Acquisition Transaction is completed is approved by the Board and said
agreement sets forth the terms and conditions of the substitution for or
assumption of outstanding awards of the Acquired Entity, said terms and
conditions shall be deemed to be the action of the Plan Administrator without
any further action by the Plan Administrator, except as may be required for
compliance with Rule 16b-3 under the Exchange Act, and the persons holding such
awards shall be deemed to be Optionees.
SECTION 7. TERMS AND CONDITIONS OF OPTIONS
7.1 GRANT OF OPTIONS
The Plan Administrator is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock
Options, which shall be appropriately designated.
7.2 OPTION EXERCISE PRICE
The exercise price for shares purchased under an Option shall be as
determined by the Plan Administrator, but shall not be less than 100% of the
Fair Market Value of the Common Stock on the Grant Date with respect to
Incentive Stock Options and not less than 85% of the Fair Market Value of the
Common Stock on the Grant Date with respect to Nonqualified Stock Options.
7.3 TERM OF OPTIONS
The term of each Option shall be as established by the Plan
Administrator or, if not so established, shall be 10 years from the Grant Date.
7.4 EXERCISE OF OPTIONS
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option the time at which or the installments in which the
Option shall vest and become
PAGE 6
<PAGE> 7
exercisable, which provisions may be waived or modified by the Plan
Administrator at any time. If not so established in the instrument evidencing
the Option, the Option will vest and become exercisable according to the
following schedule, which may be waived or modified, including but not limited
to providing for the acceleration of vesting upon the occurrence of certain
events as specified in the instrument evidencing the option, by the Plan
Administrator at any time:
<TABLE>
<CAPTION>
Period of Optionee's Continuous Employment or Service
With the Company or Its Subsidiaries Percent of Total Option
From the Grant or Vesting Date That Is Vested and Exercisable
------------------------------ ------------------------------
<S> <C>
After One Year 25%
Each Full Month Thereafter 2.08%
On or After Four Years 100%
</TABLE>
To the extent that the right to purchase shares has accrued thereunder,
an Option may be exercised from time to time by written notice to the Company,
in accordance with procedures established by the Plan Administrator, setting
forth the number of shares with respect to which the Option is being exercised
and accompanied by payment in full as described in Section 7.5. The Plan
Administrator may determine at any time that an Option may not be exercised as
to less than 100 shares at any one time (or the lesser number of remaining
shares covered by the Option).
7.5 PAYMENT OF EXERCISE PRICE
The exercise price for shares purchased under an Option shall be paid in
full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or by check or, unless the Plan Administrator in its sole
discretion determines otherwise, either at the time the Option is granted or at
any time before it is exercised, a combination of cash and/or check (if any) and
one or both of the following alternative forms: (a) tendering (either actually
or, if and so long as the Common Stock is registered under Section 12(b) or
12(g) of the Exchange Act, by attestation) Common Stock already owned by the
Optionee for at least six months (or any shorter period necessary to avoid a
charge to the Company's earnings for financial reporting purposes) having a Fair
Market Value on the day prior to the exercise date equal to the aggregate Option
exercise price or (b) if and so long as the Common Stock is registered under
Section 12(b) or 12(g) of the Exchange Act, delivery of a properly executed
exercise notice, together with irrevocable instructions, to (i) a brokerage firm
designated by the Company to deliver promptly to the Company the aggregate
amount of sale or loan proceeds to pay the Option exercise price and any
withholding tax obligations that may arise in connection with the exercise and
(ii) the Company to deliver the certificates for such purchased shares directly
to such brokerage firm, all in accordance with the regulations of the Federal
Reserve Board. In addition, to the extent permitted by the Plan Administrator in
its sole discretion, the price for shares purchased under an Option may be paid,
either singly or in combination with one or more of the alternative forms of
payment authorized by this Section 7.5, by (y) a promissory note delivered
pursuant to Section 12 or (z) such other consideration as the Plan Administrator
may permit.
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<PAGE> 8
7.6 POST-TERMINATION EXERCISES
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option whether the Option will continue to be exercisable, and
the terms and conditions of such exercise, if an Optionee ceases to be employed
by, or to provide services to, the Company or its Subsidiaries, which provisions
may be waived or modified by the Plan Administrator at any time. If not so
established in the instrument evidencing the Option, the Option will be
exercisable according to the following terms and conditions, which may be waived
or modified by the Plan Administrator at any time.
In case of termination of the Optionee's employment or services other
than by reason of death or Cause, the Option shall be exercisable, to the extent
of the number of shares purchasable by the Optionee at the date of such
termination, only (a) within one year if the termination of the Optionee's
employment or services is coincident with Retirement, Early Retirement at the
Company's request or Disability or (b) within 90 days after the date the
Optionee ceases to be an employee, director, officer, consultant, agent, advisor
or independent contractor of the Company or a Subsidiary if termination of the
Optionee's employment or services is for any reason other than Retirement, Early
Retirement at the Company's request or Disability, but in no event later than
the remaining term of the Option. Any Option exercisable at the time of the
Optionee's death may be exercised, to the extent of the number of shares
purchasable by the Optionee at the date of the Optionee's death, by the personal
representative of the Optionee's estate, the person(s) to whom the Optionee's
rights under the Option have passed by will or the applicable laws of descent
and distribution or the beneficiary designated pursuant to Section 9 at any time
or from time to time within one year after the date of death, but in no event
later than the remaining term of the Option. Any portion of an Option that is
not exercisable on the date of termination of the Optionee's employment or
services shall terminate on such date, unless the Plan Administrator determines
otherwise. In case of termination of the Optionee's employment or services for
Cause, the Option shall automatically terminate upon first notification to the
Optionee of such termination, unless the Plan Administrator determines
otherwise. If a Optionee's employment or services with the Company are suspended
pending an investigation of whether the Optionee shall be terminated for Cause,
all the Optionee's rights under any Option likewise shall be suspended during
the period of investigation.
A transfer of employment or services between or among the Company and
its Subsidiaries shall not be considered a termination of employment or
services. The effect of a Company-approved leave of absence on the terms and
conditions of an Option shall be determined by the Plan Administrator, in its
sole discretion.
SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock
Options shall be subject to the following additional terms and conditions:
8.1 DOLLAR LIMITATION
To the extent the aggregate Fair Market Value (determined as of the
Grant Date) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time
PAGE 8
<PAGE> 9
during any calendar year (under the Plan and all other stock option plans of the
Company) exceeds $100,000, such portion in excess of $100,000 shall be treated
as a Nonqualified Stock Option. In the event the Optionee holds two or more such
Options that become exercisable for the first time in the same calendar year,
such limitation shall be applied on the basis of the order in which such Options
are granted.
8.2 10% SHAREHOLDERS
If an individual owns more than 10% of the total voting power of all
classes of the Company's stock, then the exercise price per share of an
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
the Common Stock on the Grant Date and the Option term shall not exceed five
years. The determination of 10% ownership shall be made in accordance with
Section 422 of the Code.
8.3 ELIGIBLE EMPLOYEES
Individuals who are not employees of the Company or one of its parent
corporations or subsidiary corporations may not be granted Incentive Stock
Options. For purposes of this Section 8.3, "parent corporation" and "subsidiary
corporation" shall have the meanings attributed to those terms for purposes of
Section 422 of the Code.
8.4 TERM
The term of an Incentive Stock Option shall not exceed 10 years.
8.5 EXERCISABILITY
To qualify for Incentive Stock Option tax treatment, an Option
designated as an Incentive Stock Option must be exercised within three months
after termination of employment for reasons other than death, except that, in
the case of termination of employment due to total disability, such Option must
be exercised within one year after such termination. Employment shall not be
deemed to continue beyond the first 90 days of a leave of absence unless the
Optionee's reemployment rights are guaranteed by statute or contract. For
purposes of this Section 8.5, "total disability" shall mean a mental or physical
impairment of the Optionee that is expected to result in death or that has
lasted or is expected to last for a continuous period of 12 months or more and
that causes the Optionee to be unable, in the opinion of the Company and two
independent physicians, to perform his or her duties for the Company and to be
engaged in any substantial gainful activity. Total disability shall be deemed to
have occurred on the first day after the Company and the two independent
physicians have furnished their opinion of total disability to the Plan
Administrator.
8.6 TAXATION OF INCENTIVE STOCK OPTIONS
In order to obtain certain tax benefits afforded to Incentive Stock
Options under Section 422 of the Code, the Optionee must hold the shares issued
upon the exercise of an Incentive Stock Option for two years after the Grant
Date of the Incentive Stock Option and one year from the date of exercise. An
Optionee may be subject to the alternative minimum tax at the
PAGE 9
<PAGE> 10
time of exercise of an Incentive Stock Option. The Plan Administrator may
require an Optionee to give the Company prompt notice of any disposition of
shares acquired by the exercise of an Incentive Stock Option prior to the
expiration of such holding periods.
8.7 PROMISSORY NOTES
The amount of any promissory note delivered pursuant to Section 12 in
connection with an Incentive Stock Option shall bear interest at a rate
specified by the Plan Administrator but in no case less than the rate required
to avoid imputation of interest (taking into account any exceptions to the
imputed interest rules) for federal income tax purposes.
SECTION 9. ASSIGNABILITY
No Option granted under the Plan may be assigned, pledged or transferred
by the Optionee other than by will or by the applicable laws of descent and
distribution, and, during the Optionee's lifetime, such Option may be exercised
only by the Optionee or a permitted assignee or transferee of the Optionee (as
provided below). Notwithstanding the foregoing, and to the extent permitted by
Section 422 of the Code, the Plan Administrator, in its sole discretion, may
permit such assignment, transfer and exercisability and may permit an Optionee
to designate a beneficiary who may exercise the Option after the Optionee's
death; provided, however, that any Option so assigned or transferred shall be
subject to all the same terms and conditions contained in the instrument
evidencing the Option.
SECTION 10. ADJUSTMENTS
10.1 ADJUSTMENT OF SHARES
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a normal cash
dividend, or other change in the Company's corporate or capital structure
results in (a) the outstanding shares, or any securities exchanged therefor or
received in their place, being exchanged for a different number or class of
securities of the Company or of any other corporation or (b) new, different or
additional securities of the Company or of any other corporation being received
by the holders of shares of Common Stock of the Company, then the Plan
Administrator shall make proportional adjustments in (i) the maximum number and
kind of securities subject to the Plan as set forth in Section 4.1, and (ii) the
number and kind of securities that are subject to any outstanding Option and the
per share price of such securities, without any change in the aggregate price to
be paid therefor. The determination by the Plan Administrator as to the terms of
any of the foregoing adjustments shall be conclusive and binding.
10.2 CORPORATE TRANSACTION
Except as otherwise provided in the instrument that evidences the
Option, in the event of any Corporate Transaction, each Optionee shall have the
right, immediately prior to any such Corporate Transaction, to exercise such
Optionee's options to the extent the vesting requirements set forth in the
instrument evidencing the Option shall have been satisfied. To the extent not
PAGE 10
<PAGE> 11
exercised prior to the consummation of the Corporate Transaction, all such
Options shall terminate and cease to remain outstanding immediately following
the consummation of the Corporate Transaction, except to the extent assumed by
the successor corporation or parent thereof (the "Successor Corporation").
10.3 FURTHER ADJUSTMENT OF OPTIONS
Subject to Section 10.2, the Plan Administrator shall have the
discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or change in control of the Company, as defined by
the Plan Administrator, to take such further action as it determines to be
necessary or advisable, and fair and equitable to Optionees, with respect to
Options. Such authorized action may include (but shall not be limited to)
establishing, amending or waiving the type, terms, conditions or duration of, or
restrictions on, Options so as to provide for earlier, later, extended or
additional time for exercise and other modifications, and the Plan Administrator
may take such actions with respect to all Optionees, to certain categories of
Optionees or only to individual Optionees. The Plan Administrator may take such
action before or after granting Options to which the action relates and before
or after any public announcement with respect to such sale, merger,
consolidation, reorganization, liquidation or change in control that is the
reason for such action.
10.4 LIMITATIONS
The grant of Options will in no way affect the Company's right to
adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
SECTION 11. WITHHOLDING
The Company may require the Optionee to pay to the Company the amount of
any withholding taxes that the Company is required to withhold with respect to
the grant or exercise of any Option. Subject to the Plan and applicable law, the
Plan Administrator may, in its sole discretion, permit the Optionee to satisfy
withholding obligations, in whole or in part, by paying cash, by electing to
have the Company withhold shares of Common Stock or by transferring shares of
Common Stock to the Company, in such amounts as are equivalent to the Fair
Market Value of the withholding obligation. The Company shall have the right to
withhold from any shares of Common Stock issuable pursuant to an Option or from
any cash amounts otherwise due or to become due from the Company to the Optionee
an amount equal to such taxes. The Company may also deduct from any Option any
other amounts due from the Optionee to the Company or a Subsidiary.
SECTION 12. LOANS, INSTALLMENT PAYMENTS AND LOAN GUARANTEES
To assist an Optionee (including an Optionee who is an officer or a
director of the Company) in acquiring shares of Common Stock pursuant to an
Option granted under the Plan, the Plan Administrator, in its sole discretion,
may authorize, either at the Grant Date or at any time before the acquisition of
Common Stock pursuant to the Option, (a) the extension of a loan
PAGE 11
<PAGE> 12
to the Optionee by the Company, (b) the payment by the Optionee of the purchase
price, if any, of the Common Stock in installments, or (c) the guarantee by the
Company of a loan obtained by the Optionee from a third party. The terms of any
loans, installment payments or loan guarantees, including the interest rate and
terms of repayment, will be subject to the Plan Administrator's discretion.
Loans, installment payments and loan guarantees may be granted with or without
security. The maximum credit available is the purchase price, if any, of the
Common Stock acquired, plus the maximum federal and state income and employment
tax liability that may be incurred in connection with the acquisition.
SECTION 13. REPURCHASE AND FIRST REFUSAL RIGHTS
13.1 REPURCHASE RIGHTS
Should the Optionee cease to be employed by or provide services to the
Company, then all shares of Common Stock issued pursuant to the Plan, whether
issued before or after cessation of employment or services, shall, unless
otherwise determined by the Plan Administrator, be subject to repurchase at the
Fair Market Value of such shares on the date of such repurchase. The terms and
conditions upon which such repurchase right shall be exercisable (including the
period and procedure for exercise) shall be established by the Plan
Administrator and set forth in the agreement evidencing such right.
All of the Company's outstanding repurchase rights under this Section
13.1 are assignable by the Company at any time. Such rights shall automatically
terminate, and all shares subject to such terminated rights shall immediately
vest in full, upon the occurrence of a Corporate Transaction, except to the
extent: (i) any such repurchase right is expressly assigned to the Successor
Corporation in connection with the Corporate Transaction or (ii) such
termination is precluded by other limitations imposed by the Plan Administrator
at the time the repurchase right is issued.
The Plan Administrator shall have the discretionary authority,
exercisable either before or after the Optionee's cessation of employment or
services, to cancel the Company's outstanding repurchase rights with respect to
one or more shares purchased or purchasable by the Optionee under an Option.
13.2 FIRST REFUSAL RIGHTS
Until the date on which the initial registration of the Common Stock
under Section 12(b) or 12(g) of the Exchange Act first becomes effective, the
Company shall have the right of first refusal with respect to any proposed sale
or other disposition by the holder of any shares of Common Stock issued pursuant
to an Option granted under the Plan. Such right of first refusal shall be
exercisable in accordance with the terms and conditions established by the Plan
Administrator and set forth in the agreement evidencing such right.
SECTION 14. MARKET STANDOFF
In connection with any underwritten public offering by the Company of
its equity securities pursuant to an effective registration statement filed
under the Securities Act, including
PAGE 12
<PAGE> 13
the Company's initial public offering, a person shall not sell, or make any
short sale of, loan, hypothecate, pledge, grant any option for the purchase of,
or otherwise dispose or transfer for value or otherwise agree to engage in any
of the foregoing transactions with respect to, any shares issued pursuant to an
Option granted under the Plan without the prior written consent of the Company
or its underwriters. Such limitations shall be in effect for such period of time
as may be requested by the Company or such underwriters and agreed to by the
Company's officers and directors with respect to their shares; provided,
however, that in no event shall such period exceed 180 days. The limitations of
this paragraph shall in all events terminate two years after the effective date
of the Company's initial public offering. Holders of shares issued pursuant to
an Option granted under the Plan shall be subject to the market standoff
provisions of this paragraph only if the officers and directors of the Company
are also subject to similar arrangements.
In the event of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
Company's outstanding Common Stock effected as a class without the Company's
receipt of consideration, then any new, substituted or additional securities
distributed with respect to the purchased shares shall be immediately subject to
the provisions of this Section 14, to the same extent the purchased shares are
at such time covered by such provisions.
In order to enforce the limitations of this Section 14, the Company may
impose stop-transfer instructions with respect to the purchased shares until the
end of the applicable standoff period.
SECTION 15. AMENDMENT AND TERMINATION OF PLAN
15.1 AMENDMENT OF PLAN
The Plan may be amended only by the Board in such respects as it shall
deem advisable; however, to the extent required for compliance with Section 422
of the Code or any applicable law or regulation, shareholder approval will be
required for any amendment that will (a) increase the total number of shares as
to which Options may be granted under the Plan, (b) modify the class of persons
eligible to receive Options, or (c) otherwise require shareholder approval under
any applicable law or regulation.
15.2 TERMINATION OF PLAN
The Board may suspend or terminate the Plan at any time. The Plan will
have no fixed expiration date; provided, however, that no Incentive Stock
Options may be granted more than 10 years after the earlier of the Plan's
adoption by the Board and approval by the shareholders.
15.3 CONSENT OF OPTIONEE
The amendment or termination of the Plan shall not, without the consent
of the Optionee, impair or diminish any rights or obligations under any Option
theretofore granted under the Plan.
PAGE 13
<PAGE> 14
Any change or adjustment to an outstanding Incentive Stock Option shall
not, without the consent of the Optionee, be made in a manner so as to
constitute a "modification" that would cause such Incentive Stock Option to fail
to continue to qualify as an Incentive Stock Option.
SECTION 16. GENERAL
16.1 OPTION AGREEMENTS
Options granted under the Plan shall be evidenced by a written agreement
that shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and that are not inconsistent with the
Plan.
16.2 CONTINUED EMPLOYMENT OR SERVICES; RIGHTS IN OPTIONS
None of the Plan, participation in the Plan or any action of the Plan
Administrator taken under the Plan shall be construed as giving any person any
right to be retained in the employ of the Company or limit the Company's right
to terminate the employment or services of any person.
16.3 REGISTRATION
The Company shall be under no obligation to any Optionee to register for
offering or resale or to qualify for exemption under the Securities Act, or to
register or qualify under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or created by, the
Plan, or to continue in effect any such registrations or qualifications if made.
The Company may issue certificates for shares with such legends and subject to
such restrictions on transfer and stop-transfer instructions as counsel for the
Company deems necessary or desirable for compliance by the Company with federal
and state securities laws.
Inability of the Company to obtain, from any regulatory body having
jurisdiction, the authority deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any shares hereunder or the unavailability of an
exemption from registration for the issuance and sale of any shares hereunder
shall relieve the Company of any liability in respect of the nonissuance or sale
of such shares as to which such requisite authority shall not have been
obtained.
As a condition to the exercise of an Option, the Company may require the
Optionee to represent and warrant at the time of any such exercise or receipt
that such shares are being purchased or received only for the Optionee's own
account 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 relevant provision of the aforementioned laws. At the option of the Company,
a stop-transfer order against any such shares may be placed on the official
stock books and records of the Company, and a legend indicating that such shares
may not be pledged, sold or otherwise transferred, unless an opinion of counsel
is provided (concurred in by counsel for the Company) stating that such transfer
is not in violation of any applicable law or regulation, may be stamped on stock
certificates to ensure exemption from registration. The Plan Administrator may
also require such other action or agreement by the Optionee as may from time to
time be necessary to comply with the federal and state securities laws.
PAGE 14
<PAGE> 15
16.4 NO RIGHTS AS A SHAREHOLDER
No Option shall entitle the Optionee to any dividend, voting or other
right of a shareholder unless and until the date of issuance under the Plan of
the shares that are the subject of such Option, free of all applicable
restrictions.
16.5 COMPLIANCE WITH LAWS AND REGULATIONS
Notwithstanding anything in the Plan to the contrary, the Board, in its
sole discretion, may bifurcate the Plan so as to restrict, limit or condition
the use of any provision of the Plan to Optionees who are officers or directors
subject to Section 16 of the Exchange Act without so restricting, limiting or
conditioning the Plan with respect to other Optionees. Additionally, in
interpreting and applying the provisions of the Plan, any Option granted as an
Incentive Stock Option pursuant to the Plan shall, to the extent permitted by
law, be construed as an "incentive stock option" within the meaning of Section
422 of the Code.
16.6 NO TRUST OR FUND
The Plan is intended to constitute an "unfunded" plan. Nothing contained
herein shall require the Company to segregate any monies or other property, or
shares of Common Stock, or to create any trusts, or to make any special deposits
for any immediate or deferred amounts payable to any Optionee, and no Optionee
shall have any rights that are greater than those of a general unsecured
creditor of the Company.
16.7 SEVERABILITY
If any provision of the Plan or any Option is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Option under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Plan Administrator's determination, materially altering the intent of the
Plan or the Option, such provision shall be stricken as to such jurisdiction,
person or Option, and the remainder of the Plan and any such Option shall remain
in full force and effect.
SECTION 17. EFFECTIVE DATE
The Plan's effective date is the date on which it is adopted by the
Board, so long as it is approved by the Company's shareholders at any time
within 12 months of such adoption.
Adopted by the Board effective as of May 11, 1998 and approved by the
Company's shareholders effective as of May 11, 1998.
Amended to increase the number of shares available under the Plan to
1,478,568 shares, approved by the Board on September 24, 1998, and by the
Shareholders on September 30, 1998.
PAGE 15
<PAGE> 16
Amended to increase the number of shares available under the Plan to
2,478,568 shares, approved by the Board on March 19, 1999, and by the
Shareholders on March 19, 1999.
Amended to increase the number of shares available under the Plan to
3,478,568 shares, approved by the Board on January 24, 2000, and by the
Shareholders on February 7, 2000.
PAGE 16
<PAGE> 1
EXHIBIT 10.3
AOL ADVERTISING INSERTION ORDER
Contract #:
---------------------------------
AOL Salesperson: [ ] Credit approval received
---------------------------
Sales Coordinator:
--------------------------
Date: 06/30/99 (the "Effective Date")
<TABLE>
<CAPTION>
=========================================================================================
ADVERTISER ("ADVERTISER") ADVERTISING AGENCY
=========================================================================================
<S> <C> <C>
Contact Person Jeanette Slepian
- -----------------------------------------------------------------------------------------
Company Name 800.com
- -----------------------------------------------------------------------------------------
Address - Line 1 1516 NW Thurman
- -----------------------------------------------------------------------------------------
Address - Line 2 Portland, Oregon 97209
- -----------------------------------------------------------------------------------------
Phone # 503-944-3640
- -----------------------------------------------------------------------------------------
Fax # 503-944-3690
- -----------------------------------------------------------------------------------------
SIC Code
- -----------------------------------------------------------------------------------------
Advertiser IAB Category
- -----------------------------------------------------------------------------------------
=========================================================================================
BILLING INFORMATION
=========================================================================================
Send Invoices to (choose one) [X] ADVERTISER [ ]
- -----------------------------------------------------------------------------------------
Advertiser or Agency Billing
Contact Person
- -----------------------------------------------------------------------------------------
Company Name
- -----------------------------------------------------------------------------------------
Billing Address - Line 1
- -----------------------------------------------------------------------------------------
Billing Address - Line 2
- -----------------------------------------------------------------------------------------
Billing Phone #
- -----------------------------------------------------------------------------------------
Billing Email Address
- -----------------------------------------------------------------------------------------
</TABLE>
PAGE 1
<PAGE> 2
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------
P.O. #, if applicable
- -----------------------------------------------------------------------------------------
BILLING & PAYMENT SCHEDULE (SELECT ONE):
[ ] If total payment due is less than or equal [ * ] and the Bank is new
to America Online, Inc. ("AOL"), payment is due upon signing* and
must be received by AOL prior to ad flight.
[ ] If total payment due is greater than [ * ], a Bank new to AOL must
have a favorable D&B credit rating (as determined by AOL). If the
new Bank does not receive a favorable credit rating or no D&B credit
rating is available, payment is due* in advance of display start
date.
[ ] Given a favorable credit rating for a new Bank or a positive payment
history for a current Bank, invoices will be due monthly commencing
on the display start date, due net 30. A current Bank with invoices
past due to AOL must pay outstanding debts prior to new display
start date.
[X] As set forth on Exhibit A attached hereto.
* PAYMENT INFORMATION IF PAYMENT IS DUE TO AOL UPON SIGNING OR PRIOR TO DISPLAY
START DATE (SELECT ONE):
[ ] Payment due is greater than or equal to [ * ], please wire funds to:
[ * ].
[ ] Payment due is less than [ * ], please mail checks to: America
Online, Inc., Attn: Accounts Receivable, General Post Office, P.O.
Box 5696, New York, NY 10087-5696.
All amounts not paid when due and payable will bear interest from the due date
at the prime rate in effect at such time. In the event of nonpayment, AOL
reserves the right to immediately terminate this Insertion Order Agreement with
written notice to Advertiser.
- -----------------------------------------------------------------------------------------
</TABLE>
- -----------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 2
<PAGE> 3
<TABLE>
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Inventory Type (choose one): [ ] AOL Service only [ ] AOL Affiliate only (e.g. AOL.com)
[ ] AOL Service & AOL
Affiliate
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
===============================================================================================
AOL SERVICE
===============================================================================================
AOL Service Display Display # of Ad
Inventory/Demographic* Start Stop Ad Type Slots Total Gross Total
Purchased Date Date Purchased Price Impressions
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
See attached Exhibit F
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
TOTAL
- -----------------------------------------------------------------------------------------------
* Attach completed AOL Demographic TOTALS:
Profile Worksheet
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
All necessary artwork and active URL's must be provided by advertiser 3 business
days prior to start date.
ARTWORK REQUIRED FROM ADVERTISER/AGENCY:
[ ] 23x60 IAB Standard/10k Max [ ] 145x30 Old Standard/10k Max [ ] 120x60 Shopping/10k Max
[ ] 175x45 Chat/Mail in-box/10k Max [ ] 197x40 PF Area/10k Max [ ] Special _____
* STATIC BANNERS ONLY, NO ANIMATION*
Linking URL: The HTTP/URL address to be connected to the Advertisement shall be:
HTTP:_______________ (the "Affiliated Advertiser Site"). Advertiser shall be responsible for
any hosting or communication costs associated with the Affiliated Advertiser Site.
PLEASE SEND ARTWORK AND URL TO (CHOOSE ONE):
[ ] [email protected] [ ] [email protected]
------------------ ------------------
AOL reserves the right to immediately cancel any advertising flight in the event of a
material change to the nature or content of the site linked to the Advertisement.
- -----------------------------------------------------------------------------------------------
</TABLE>
PAGE 3
<PAGE> 4
<TABLE>
<CAPTION>
=================================================================================================
AOL AFFILIATE (E.G. AOL.COM)
=================================================================================================
AOL Service Display Display # of Ad
Inventory/Demographic* Start Stop Ad Type Slots Total Gross Total
Purchased Date Date Purchased Price Impressions
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AOL.com:
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Subtotal
- -------------------------------------------------------------------------------------------------
Digital City:
- -------------------------------------------------------------------------------------------------
Subtotal
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
CompuServe Service:
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Subtotal
- -------------------------------------------------------------------------------------------------
* See attached package description for TOTALS:
any AOL.com package purchases
- -------------------------------------------------------------------------------------------------
* Attach completed AOL Demographic
Profile Worksheet
- -------------------------------------------------------------------------------------------------
All necessary artwork and active URL's must be provided by advertiser 3 business
days prior to start date.
ARTWORK REQUIRED FROM ADVERTISER/AGENCY:
[ ] 468x60 NF Reviews, Search Terms, My News & Hometown/10k Max/animation OK
[ ] 100x70 AOL.com Home Page/3k Max/No animation [ ] 20x60 NF Home Page/2k Max
No animation
[ ] 120x60 Shopping/4k Max/No animation [ ] 234x60 NF Kids Only &
Hometown/5k Max/animation OK
[ ] 120x60 Instant Messenger/7.5k Max/animation OK
LINKING URL: THE HTTP/URL ADDRESS TO BE CONNECTED TO THE ADVERTISEMENT SHALL BE
THE SAME ADDRESS AS THAT OF THE AFFILIATED ADVERTISER SITE.
PLEASE SEND ARTWORK AND URL TO (CHOOSE ONE):
[ ] [email protected] [ ][email protected]
------------------ ------------------
AOL reserves the right to immediately cancel any advertising flight in the event of a material
change to the nature or content of the site linked to the Advertisement.
- -------------------------------------------------------------------------------------------------
</TABLE>
PAGE 4
<PAGE> 5
<TABLE>
<CAPTION>
=================================================================================================
ADVERTISING PURCHASE SUMMARY
=================================================================================================
<S> <C> <C> <C>
TOTAL PRICE TOTAL IMPRESSIONS CPM
AOL Networks
AOL Affiliate
Total Purchase Price
--Less Agency Discount--
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
-------------------------------------------------------------------
NET PURCHASE PRICE TOTAL IMPRESSIONS
-------------------------------------------------------------------
<S> <C>
$ 9,907,732 [*]
-------------------------------------------------------------------
</TABLE>
PRODUCTS. The only products and/or services to be offered or promoted by
Advertiser in the Advertisements within the AOL Network, or sold on the
Affiliated Advertiser Site are the categories of products listed on Exhibit D
attached hereto (the "Products"). Any products or services not listed on Exhibit
D are subject to the provisions of Section 17 of Exhibit A.
IMPRESSIONS COMMITMENT. In the event AOL delivers the impression commitment
provided for hereunder prior to the Display Stop Date, AOL may, [ * ]. Any
guarantees are to impressions (as measured by AOL in accordance with its
standard methodologies and protocols), not "click-throughs." In the event there
is (or will be in AOL's reasonable judgment) a shortfall in impressions as of
the end of a display period (a "Shortfall"), such Shortfall shall not be
considered a breach of the Agreement by AOL: instead, AOL will provide
Advertiser, as its sole remedy, with "make good" impressions through Run of
Service advertisement placements on the AOL Service which have a total value,
based on AOL's advertising rate card in effect at the time of execution of this
Agreement, equal to [ * ]% of the value of the Shortfall. To the extent
impressions commitments are identified without regard to specific placements,
such placements will be as mutually agreed upon by AOL and Advertiser during the
course of the display period. Notwithstanding the foregoing, in the event there
is [ * ], AOL shall provide Advertiser as its sole remedy with makegood
impressions [ * ]. AOL (and its affiliates) reserves the right to redesign or
modify the organization, structure, "look and feel," navigation and other
elements of the AOL Network at any time. In the event such modifications
materially and adversely affect any specific Promotion, AOL will work with
Advertiser to provide Advertiser, as its sole remedy, a comparable promotional
placement [ * ]. AOL reserves the right to alter Advertiser flight dates to
accommodate trafficking needs or other operational needs. In such cases, AOL
will make available to Advertiser reasonably equivalent flight(s). If AOL
over-delivers impressions on any screen or page within a Tier (as set forth on
Exhibit F), then AOL shall be allowed to reduce its impressions commitments to
the other screens or pages within that same Tier by the same amount. If AOL
overdelivers total overall impressions in Tier 1 overall (as set forth on
Exhibit F), then AOL shall be allowed to reduce its Tier 2 and/or Tier 3
impressions commitments by, in the aggregate, the same total
- ------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 5
<PAGE> 6
percentage, up to a maximum of [ * ] percent ([ * ]%). In addition to
the foregoing, during the Term hereof, subject to availability, AOL and
Advertiser may mutually agree to modify the [ * ] as set forth on Exhibit F. In
such event, the Parties shall mutually agree to the terms and conditions of such
[ * ] (e.g., number of impressions, display start and stop date).
STANDARD TERMS AND CONDITIONS. This Insertion Order incorporates by reference
AOL's standard advertising terms and conditions (the "Standard Terms") attached
hereto on Exhibit G, including terms related to advertising material, payment
modifications, cancellation rights, usage data, limitations of liability,
disclaimers, indemnifications, use of AOL member information and miscellaneous
legal terms. The Standard Ad Terms appear at keyword "Standard Ad Terms" on the
U.S.-based America Online brand service and at
"http://Mediaspace.aol.corrVadterms3.htmi." A hard copy of the Standard Ad Terms
will be provided to advertiser upon request. Advertiser acknowledges that it has
been provided an opportunity to review the Standard Terms as attached hereto on
Exhibit G and agrees to be bound by them.
AUTHORIZED SIGNATURES
In order to bind the parties to this Insertion Order Agreement, their duly
authorized representatives have signed their names below on the dates indicated.
This Agreement (including (i) the Standard Terms attached hereto on Exhibit G,
(ii) the additional terms and conditions on Exhibit A attached hereto, (iii) the
definitions on Exhibit B attached hereto, (iv) the cross-promotional obligations
on Exhibit C attached hereto, (v) the list of permitted Products on Exhibit D
attached hereto, (vi) the operational provisions on Exhibit E attached hereto,
and (vii) the Placement/Promotion terms on Exhibit F attached hereto; in each
case, incorporated herein by reference and made a part hereof) shall be binding
on both parties when signed on behalf of each party and delivered to the other
party (which delivery may be accomplished by facsimile transmission of the
signature pages hereto).
<TABLE>
<CAPTION>
AOL ADVERTISER
<S> <C>
By: /s/ David N. Colburn By: /s/ Gregory L. Drew
---------------------------------------- -------------------------------------
(signature) (signature)
Print Name: David Colburn Print Name: Gregory L. Drew
-------------------------------- ----------------------------
Title: Sr VP Business Affairs Title: President, CEO
------------------------------------- ---------------------------------
(print or type) (print or type)
Date: 6/30/99 Date: 6/29/99
-------------------------------------- --------------------------
</TABLE>
- ---------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 6
<PAGE> 7
EXHIBIT A
ADDITIONAL TERMS
1. PAYMENTS; LATE PAYMENTS; WIRED PAYMENTS. Subject to the provisions of
Section 16 of Exhibit A, the Impressions Commitment, Exhibit F and
Sections 2, 4 and 9 of Exhibit G, Advertiser shall pay AOL a
non-refundable guaranteed payment of Nine Million Nine Hundred Seven
Thousand Seven Hundred Thirty-Two Dollars (US $9,907,732.00), payable as
follows:
(a) upon the execution date hereof, [ * ] (US $[ * ]);
(b) on the earlier to occur of (i) the Launch Date of the new
Consumer Electronics Center of the AOL Service or (ii) August 15,
1999, [ * ] (US $[ * ]);
(c) on October 31, 1999, [ * ] (US $[ * ]);
(d) on January 31, 2000, [ * ] Dollars (US $[ * ]);
(e) on April 30, 2000, [ * ] Dollars (US $[ * ]);
(f) on July 31, 2000, [ * ] Dollars (US $[ * ]);
(g) on October 31, 2000, [ * ] Dollars (US $[ * ]); and
(h) on January 1, 2001, [ * ] Dollars (US $[ * ]).
2. (a) CONTENT OF AFFILIATED ADVERTISER SITE. The Advertisements will only
promote the Advertiser's Products. Additionally, the Affiliated
Advertiser Site will only offer the Advertiser's Products and
Advertiser's content related thereto (except to the extent otherwise
mutually agreed upon by the parties); provided that third party content
may be included if and to the extent (i) such content consists of
independent third party reviews of Advertiser Products or consumer
reviews of Advertiser Products, (ii) Advertiser shall use best efforts
to include such content within the Affiliated Advertiser Site and
therefore subject to the terms hereof, and (iii) despite such best
efforts, to a more limited degree, links will exist to some
independently controlled third party content, Advertiser shall use best
efforts to ensure that no promotions for any Interactive Service shall
appear on any such areas and that traffic flows back to AOL or the
Affiliated Advertiser Site. Except as set forth in Section 17 of this
Exhibit A, all sales of Products through the Affiliated Advertiser Site
will be conducted solely through a direct sales format (e.g., no clubs),
absent the mutual consent of the Parties. Any content, promotion, area
or link related to [ * ] shall be at least [ * ] away from the first
page of the Affiliated Advertiser Site displayed to AOL Users, with the
exception of Advertiser's consumer electronics product offers which may
contain value added benefits which include [ * ]. Any content,
promotion, area or link related to chat, or message boards, shall be at
least [ * ] away from the first page of the Affiliated Advertiser Site
displayed to AOL Users. Notwithstanding the foregoing, AOL acknowledges
that Advertiser may include navigation bars which contain generic
- -----------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 1
<PAGE> 8
descriptions of Product categories ("Tabs") one click away from the
first page of the Affiliated Advertiser Site displayed to AOL Users, and
Advertiser may include such Tabs on the first page of the Affiliated
Advertiser Site displayed to AOL Users solely in those cases in which
such Tabs lead directly to promotions for a specific product page.
Advertiser will ensure that the prices, terms and conditions for the
Products in the Affiliated Advertiser Site are generally no less
favorable than the prices, terms and conditions on which the Products or
substantially similar products are offered by or on behalf of Advertiser
through any other distribution channels.
(b) NO THIRD PARTY ADVERTISEMENTS WITHIN THE AFFILIATED ADVERTISER SITE.
All sales of Advertisements on the Affiliated Advertiser Site will be
subject to AOL's then-applicable advertising policies and AOL's
pre-existing exclusivities, as described to Advertiser by AOL. No
Interactive Service (other than AOL or its affiliates) will be promoted
in the Affiliated Advertiser Site. Notwithstanding the foregoing, in the
event Advertiser sells any Advertisements for any [ * ] within the
Affiliated Advertiser Site in violation of this Section, AOL shall
provide Advertiser notice of such violation and Advertiser shall have [
* ] to remove any and all such Advertisements from the Affiliated
Advertiser Site. In such event, until such time that Advertiser removes
such Advertisement(s) to AOL's reasonable satisfaction, AOL will be
relieved of the proportionate amount of any promotional commitment made
to Advertiser by AOL, including, without limitation, the impressions
commitment set forth in this Agreement, and AOL may, in its sole
discretion, remove or disable all links to the Affiliated Advertiser
Site. In addition to the foregoing, Advertiser's failure to remove all
such Advertisements within such [ * ] cure period shall constitute a
material breach of this Agreement.
3. SPECIAL OFFERS/MEMBER BENEFITS. Advertiser will generally promote
through the Affiliated Advertiser Site special or promotional offers
which are generally as good as those made available by or on behalf of
Advertiser, if any, through any other distribution channels. In
addition, Advertiser shall promote through the Affiliated Advertiser
Site on a reasonably regular and consistent basis which shall be no less
frequent than twice quarterly, certain special offers exclusively
available to AOL Users (the "AOL Special Offers") which Advertiser
intends to dynamically serve to AOL Users coming from the AOL Network.
AOL Special Offers made available by Advertiser shall provide a
substantial benefit to AOL Users, either by virtue of a meaningful price
discount, product enhancement, unique service benefit or other special
feature (it being understood that the exact product or products in
Advertiser's permitted product line which is the subject of any such AOL
Special Offer, and the exact nature of the relevant special benefit,
shall be up to Advertiser in its reasonable discretion). Advertiser will
provide AOL with reasonable prior notice of AOL Special
Offers so that AOL can
- -----------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 2
<PAGE> 9
market the availability of such AOL Special Offers in the manner AOL
deems appropriate in its editorial discretion.
4. SHOPPING CHANNEL PROVISIONS
(a) AOL QUICK CHECKOUT. Advertiser will take all reasonable steps
necessary to conform its promotion and sale of products through
the Affiliated Advertiser Site to the then-existing commerce
technologies made available to Advertiser by AOL, including
without limitation AOL's "quick checkout" tool which allows AOL
users to enter payment and shipping information which is then
passed from AOL's centralized server unit to Advertiser for
order fulfillment ("AOL Quick Checkout"). AOL will make all
reasonable efforts to provide the tools for the Advertiser to
enable the Affiliated Advertiser Site with the AOL Quick
Checkout technology and functionality. Collection, storage and
disclosure of information which Advertiser provides to AOL for
such purpose will be subject to AOL's privacy policy and all
confidentiality requirements hereunder. To the extent that the
Affiliated Advertiser Site includes AOL's Quick Checkout, such
AOL Quick Checkout product need not be exclusive, in that
Advertiser is expressly permitted to make other checkout or
payment methods available, provided that Advertiser will ensure
that the AOL Quick Checkout is of reasonably equal placement and
promotional prominence in the aggregate to other available
payment options.
(b) MERCHANT CERTIFICATION PROGRAM. Advertiser will participate in
any generally applicable "Certified Merchant" program operated
by AOL or its authorized agents or contractors. Such program may
require Advertiser participants on the Shopping Channel on an
ongoing basis to meet certain reasonable standards relating to
provision of [ * ] through the AOL Service, AOL.com, NetCenter
and the CompuServe Service.
(c) BIZRATE SURVEY. Advertiser may, at it's sole discretion,(i)
participate in the BizRate(R) Program, a service offered by
Binary Compass Enterprises, Inc. (BCE), which provides opt-in
satisfaction surveys to AOL Users who purchase products through
such Affiliated Advertiser Site or such other provider of such
services as AOL may reasonably designate or approve from time to
time, and (ii) provide a link to BizRate's then-current standard
survey forms, or such other survey forms offered by any other
similar party that AOL may reasonably designate or approve from
time to time. In the event Advertiser chooses to participate in
the BizRate(R) Program, Advertiser's participation shall be
based upon a separate written agreement which Advertiser will
enter into with BCE,
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
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<PAGE> 10
or other such party reasonably designated or approved by AOL.
Pursuant to such agreement, Advertiser may authorize BCE, in
Advertiser's sole discretion, to provide to AOL any and all
reports provided to Advertiser by BCE, or other third party
providing such services,. and agrees to provide written notice
of such authorization to BCE, or such other third party, as
applicable.
(d) SPECIFIC CUSTOMER SERVICE REQUIREMENTS. Advertiser will receive
all emails from Customers via a computer available to
Advertiser's customer service staff and generally respond to
such emails within one business day of receipt. Advertiser will
receive all orders electronically and generally process all
orders within one business day of receipt, provided products
ordered are not advance order items and provided further that
some products may not be shipped within the first (24) hours of
receiving and processing the order. Advertiser will ensure that
all orders of products are received, processed, fulfilled and
delivered on a timely and professional basis. Advertiser will
offer AOL Users who purchase products through such the
Affiliated Advertiser Site a 30-day money-back satisfaction
guarantee; provided however that on [ * ] Advertiser may offer
instead a 7-day money-back satisfaction guarantee. Advertiser
will bear all responsibility for compliance with federal, state
and local laws in the event that products are out of stock or
are no longer available at the time an order is received.
Advertiser will also comply with the requirements of any
federal, state or local consumer protection or disclosure law.
Payment for products will be collected by Advertiser directly
from customers, Advertisers order fulfillment operation will be
subject to AOL's reasonable review.
5. NAVIGATION. Advertiser shall provide continuous navigational ability for
AOL or users to return to an agreed-upon point on the AOL Network (for
which AOL shall supply the proper address) from the Affiliated
Advertiser Site (e.g., the point on the AOL Service from which the
Affiliated Advertiser Site is linked), which, at AOL's option, may be
satisfied through the use of a hybrid browser format. Additionally, in
cases where an AOL User performs a search for Advertiser through any
search or navigational tool or mechanism that is accessible or available
through the AOL Network (including without limitation Advertisements,
AOL Service "Keywords", AOL.com "Search Terms", CompuServe "Go Words" or
any other promotions or navigational tools), AOL shall have the right to
direct such AOL User to the Affiliated Advertiser Site, or any other
Advertiser Interactive Site determined by AOL in its reasonable
discretion.
6. AUDITING RIGHTS. Advertiser will maintain complete, clear and accurate
records of all expenses, revenues and fees in connection with the
performance of this Insertion Order
- --------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
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<PAGE> 11
Agreement. For the sole purpose of ensuring compliance with this
Insertion Order Agreement, AOL (or its representative) will have the
right to conduct a reasonable and necessary inspection of portions of
the books and records of Advertiser which are relevant to Advertiser's
performance pursuant to this Insertion Order Agreement. Any such audit
may be conducted no more than once during any [ * ] prior written notice
to Advertiser, provided Advertiser and AOL enter into a revenue share
agreement during the term of this Agreement, AOL shall bear the expense
of any audit conducted pursuant to this paragraph unless such audit
shows an error in AOL's favor amounting to a deficiency to AOL in excess
of [ * ] percent ([ * ]%) of the actual amounts paid and/or payable to
AOL hereunder, in which event Advertiser shall bear, the reasonable
expenses of the audit. Advertiser shall pay AOL the amount of any
deficiency discovered by AOL within [ * ] after receipt of notice
thereof from AOL. AOL shall, at AOL's expense and on reasonable request
from Advertiser, provide an independent third party audit of the AOL
impressions reports described in Section 10 in form and substance
similar to that then provided to AOL's other commerce partners
generally.
7. TAXES. Advertiser will collect and pay and indemnity and hold AOL
harmless from, any sales, use, excise, import or export value added or
similar tax or duty not based on AOL's net income, including any
penalties and interest, as well as any costs associated with the
collection or withholding thereof, including attorneys' fees.
8. SALES REPORTS. Advertiser will provide AOL in an automated manner with a
monthly report in an AOL-designated format, detailing the following
activity in such period (and any other information mutually agreed upon
by the parties or reasonably required for measuring revenue activity by
Advertiser through the Affiliated Advertiser Site): (i) aggregate
summary sales information by day; and (ii) general sales information by
product category or promotion and screen name, SKU or product
description) (the information in clauses (i) and (ii), "Sales Reports").
More generally, each payment to be made by Advertiser pursuant to-the
revenue sharing provisions of Section 16 hereof ("Continued
Link/Renewal"), will be accompanied by a report containing information
which supports the payment, including information identifying (a) date,
number of products sold, number of orders, gross Transaction Revenues
and all items deducted or excluded from gross Transaction Revenues to
produce Transaction Revenues and (b) Advertising Revenues (if and to the
extent applicable).
9. IMPRESSIONS REPORTS. AOL shall provide monthly reports to Advertiser,
and weekly reports upon request by Advertiser with respect only to any
"ad served" Impressions (but no more frequently than monthly with
respect to fixed placements), consistent with current practice,
specifying the number of impressions to the pages containing
Advertiser's Promotions during the period since the previous such
report, consistent
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<PAGE> 12
with AOL's then standard reporting policies. Advertiser shall not
disclose any such information to any third party without AOL's written
consent, except that, as set forth in and consistent with Section 17 and
the Standard Terms, Advertiser may disclose such information to the
extent required by law, or by a court of competent jurisdiction or
proper governmental authority.
10. SOLICITATION OF AOL USERS. During the term of the Agreement and for a [
* ] period thereafter, Advertiser will not use the AOL Network
(including, without limitation, the e-mail network contained therein) to
solicit AOL Users on behalf of another Interactive Service. More
generally, Advertiser will not send unsolicited, commercial e-mail
(i.e., "spam") or other online communications through or into AOL's
products or services, absent a Prior Business Relationship. For purposes
of this Agreement, a "Prior Business Relationship" will mean that the
AOL User to whom commercial e-mail or other online communication is
being sent has voluntarily either (i) engaged in a transaction with
Advertiser or (ii) provided information to Advertiser through a contest,
registration, or other communication, which included clear notice to the
AOL User that the information provided could result in commercial e-mail
or other online communication being sent to that AOL User by Advertiser
or its agents. Any commercial e-mail or other online communications to
AOL Users which are otherwise permitted hereunder, will (a) include a
prominent and easy means to "opt-out" of receiving any future commercial
communications from Advertiser, and (b) shall also be subject to AOL's
then-standard restrictions as generally applicable to all AOL partners
on distribution of bulk e-mail (e.g., related to the time and manner in
which such e-mail can be distributed through or into the AOL product or
service in question). Notwithstanding the foregoing, in the event
Advertiser violates the requirements of this Section, AOL shall provide
Advertiser notice of such violation. In the event that Advertiser
commits a similar violation of this Section thereafter, such violation
shall constitute a material breach of this Agreement, and AOL shall have
the right to immediately terminate this Agreement upon written notice to
Advertiser. In such event, AOL will be relieved of the proportionate
amount of any promotional commitment made to Advertiser by AOL,
including, without limitation, the impressions commitment set forth in
this Agreement, and AOL may, in its sole discretion, remove or disable
all links to the Affiliated Advertiser Site.
11. COLLECTION AND USE OF USER INFORMATION. Advertiser shall ensure that its
collection, use and disclosure of information obtained from AOL Users
under this Agreement ("User Information") complies with (i) all
applicable laws and regulations and (ii) AOL's standard privacy
policies, available on the AOL Service at the keyword term "Privacy"
(or, in the case of the Affiliated Advertiser Site, Advertiser's
standard privacy policies so long as such policies are prominently
published on the site and provide adequatenotice, disclosure and choice
to users regarding Advertiser's collection, use and disclosure of
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
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<PAGE> 13
user information). Advertiser will not disclose User Information
collected hereunder to any third party in a manner that identifies AOL
Users as end users of an AOL product or service or use Member
Information collected under this Agreement to market another Interactive
Service, except that, as set forth in and consistent with Section 17 and
the Standard Terms, Advertiser may disclose such information to the
extent required by law, or by a court of competent jurisdiction or
proper governmental authority.
12. AOL LOOK AND FEEL. Advertiser acknowledges and agrees that AOL will own
all right, title and interest in and to the AOL Look and Feel (subject
only to Advertisers ownership rights in any Advertiser trademarks or
Advertiser-owned copyrighted material within the Affiliated Advertiser
Site). AOL acknowledges and agrees that Advertiser will own all right,
title and interest in and to the elements of graphics, design,
organization, presentation, layout, user interface, navigation and
stylistic convention (including the digital implementations thereof)
which are generally associated with the Affiliated Advertiser Site,
subject to AOL's ownership rights in the AOL Look and Feel, and any AOL
trademarks or copyrighted material of AOL, if any, included therein.
13. MANAGEMENT OF THE AFFILIATED ADVERTISER SITE. Advertiser will manage,
review, delete, edit, create, update and otherwise manage all Content
available on or through the Affiliated Advertiser Site, in a timely and
professional manner and in accordance with the terms of this Agreement.
Advertiser will ensure that the Affiliated Advertiser Site is current,
accurate and well-organized at all times. Advertiser warrants that the
Licensed Content: (i) will not infringe on or violate any copyright,
trademark, U.S. patent or any other third party right; (ii) will not
violate AOL's thenapplicable Terms of Service or any other standard,
written AOL policy; and (iii) will not violate any applicable law or
regulation (federal, state, or otherwise), including without limitation
those relating to taxes, advertising, or contests, sweepstakes or
similar promotions. Additionally, Advertiser represents and warrants
that it owns or has a valid license to all rights to any Licensed
Content used in AOL "slideshow" or other formats embodying elements such
as graphics, animation and sound, free and clear of all encumbrances and
without violating the rights of any other person or entity. In the event
AOL notifies Advertiser that the Licensed Content, or any part thereof,
violates any AOL written policy or standard, Advertiser shall have [ * ]
to materially cure any such violation upon receipt of such notice.
Advertiser's failure to materially cure any such violation within such
cure period shall be a material breach of this Agreement. Advertiser
also warrants that a reasonable basis exists for all Product performance
or comparison claims appearing through the Affiliated Advertiser Site.
Advertiser shall not in any manner, including, without limitation in any
Advertisement, the Licensed Content, or any Materials (defined below),
state or imply that AOL recommends or endorses Advertiser
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
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or Advertiser's Services (e.g., no statements that Advertiser is an
"official" or "preferred" provider of products or services for AOL), but
may state that Advertiser is an "anchor tenant" or "anchor merchant"
within the AOL Consumer Electronics Center of the standard AOL Service.
AOL will have no obligations with respect to the Products available on
or through the Affiliated Advertiser Site, including, but not limited
to, any duty to review or monitor any such Products.
14. DUTY TO INFORM. Advertiser will promptly inform AOL of any information
related to the Affiliated Advertiser Site which could reasonably lead to
a claim, demand, or liability of or against AOL and/or its affiliates by
any third party. AOL will promptly inform Advertiser of any information
related to the [ * ] which could reasonably lead to a claim, demand, or
liability of or against Advertiser by any third party.
15. PROMOTIONAL MATERIALS/PRESS RELEASES. Each Party will submit to the
other Party, for its prior written approval, which will not be
unreasonably withheld or delayed, any press release or any other public
statement ("Press Release") regarding the execution of this Agreement
and/or the transactions contemplated hereunder. Notwithstanding the
foregoing, either Party may issue Press Releases and other disclosures
as required by law without the consent of the other Party and in such
event, the disclosing Party will provide at least [ * ] prior written
notice of such disclosure. The failure by one Party to obtain the prior
written approval of the other Party prior to issuing a Press Release
(except as required by law) shall be deemed a material breach of this
Agreement for which there is no adequate cure. In such event, the
non-breaching Party may terminate this Agreement upon written notice to
the other Party. Each Party will submit to the other Party, for its
prior written approval, which will not be unreasonably withheld or
delayed, any marketing, advertising, or other promotional materials,
excluding Press Releases, related to the Affiliated Advertiser Site as
available to AOL Users and/or referencing the other Party and/or its
trade names, trademarks, and service marks (the "Promotional
Materials"); provided, however, that either Party's use of screen shots
of the Affiliated Advertiser Site for promotional purposes will not
require the approval of the other Party so long as America Online(R) is
clearly identified as the source of such screen shots; and provided
further, however, that, following the initial public announcement of the
business relationship between the Parties in accordance with the
approval and other requirements contained herein, either Party's
subsequent factual reference to the existence of a business relationship
between the Parties in Promotional Materials, will not require the
approval of the other Party. Each Party will solicit and reasonably
consider the views of the other Party in designing and implementing such
Promotional Materials. Once approved, the Promotional Materials may be
used by a
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
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Party and its affiliates for the purpose of promoting the Affiliated
Advertiser Site and the content contained therein and reused for such
purpose until such approval is withdrawn with reasonable prior notice.
In the event such approval is withdrawn, existing inventories of
Promotional Materials may be depleted.
16. (a) TERM. Unless earlier terminated as set forth herein, the initial
term of this Agreement shall commence on the Effective Date and shall
expire two years after such Effective Date (the "Initial Term");
provided, however, that at any time after [ * ] from the Effective
Date, if Advertiser no longer undertakes any activities or engages in
any manner whatsoever in the [ * ] business, then Advertiser may
terminate the Agreement upon [ * ] prior written notice to AOL. In the
event of such termination by Advertiser, Advertiser will be responsible
for the pro-rata portion of the fee allocable to the display of the
Promotion based on the number of days that the Promotion was displayed;
provided, however, that in the event Advertiser re-enters the [ * ]
business at any time after such termination date but prior to the date
[ * ] from the Effective Date herein then Advertiser will be
responsible for the entire [ * ] due under Section 1 on this Exhibit A
and Advertiser will not be entitled to any pro-ration of the fees
payable to AOL under this Agreement.
(b) CONTINUED LINK/RENEWAL. Upon conclusion of the Initial Term, AOL
will have the right to renew the Agreement for a maximum of [ * ]
successive [ * ] renewal terms (each a "Renewal Term" and together with
the Initial Term, the "Term"). A Renewal Term shall automatically
commence following the expiration of the Initial Term (or prior Renewal
Term, as the case may be), provided that AOL shall be entitled to
terminate any such Renewal Term with [ * ] days prior written notice to
Advertiser. AOL may, at its discretion, continue to promote one or more
"pointers" or links from the AOL Network to the Affiliated Advertiser
Site (or, if the Affiliated Advertiser Site no longer exists, to any
Advertiser Interactive Site) and continue to use Advertiser's trade
names, trade marks and service marks in connection therewith, subject to
the provisions of Section 9 of Exhibit G (collectively, a "Continued
Link"). As long as AOL maintains a Continued Link, Advertiser shall pay
to AOL (A) [ * ] percent ([ * ]%) of Transaction Revenues of electronics
category products which were sold during a linked session from the AOL
Network, payable on a quarterly basis within [ * ] days following the
end of the quarter in which the applicable Transaction Revenues were
generated); and (B) in the event that AOL promotes categories of
products for Advertiser other than [ * ], [ * ] percent ([ * ]%) of
Transaction Revenues of those promoted nonelectronics products sold
during a linked session from the AOL Network, payable [ * ] following
the end of the quarter in which the applicable revenues were generated.
17. ALTERNATIVE REVENUE STREAMS. In the event Advertiser or any of its
affiliates receives or desires to receive, directly or indirectly, any
compensation in connection with the
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* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
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Affiliated Advertiser Site other than Transaction Revenues (an
"Alternative Revenue Stream"), Advertiser will promptly inform AOL in
writing, and the Parties will negotiate in good faith regarding whether
Advertiser will be allowed to market Products producing such Alternative
Revenue Stream through the Affiliated Advertiser Site. In the event that
the Parties cannot in good faith reach agreement regarding such
Alternative Revenue Stream within [ * ] of such written notice by
Advertiser, Advertiser will not engage in any activity that will
generate such Alternative Revenue Stream by offering any such services
or Products to AOL Users through the Affiliated Advertiser Site.
Expressly excluded from this Section will be revenue directly related to
any set of services, products or functionality that may be provided by a
full-service on-line retailer servicing the consumer electronics and
home entertainment market, (e.g., warranty programs and services
contracts); all advertising revenues and any fees derived from a
relationship with a credit card/bank card organization are also
expressly excluded.
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* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
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EXHIBIT B
DEFINITIONS
AFFILIATED ADVERTISER SITE. The specific area to be promoted and distributed by
AOL hereunder through which Advertiser can market and complete transactions
regarding its permitted Services.
AOL LOOK AND FEEL. The elements of graphics, design, organization, presentation,
layout, user interface, navigation and stylistic convention (including the
digital implementations thereof) which are generally associated with interactive
sites within the AOL Network.
AOL MEMBER. Any authorized user of the AOL Service, including any sub-accounts
using the AOL Service under an authorized master account.
AOL NETWORK. (i) The AOL Service, (ii) AOL.com, (iii) Digital City, (iv)
CompuServe and (v) any other product or service owned, operated, distributed or
authorized to be distributed by or through AOL or its affiliates worldwide (and
including those properties excluded from the definitions of the AOL Service or
AOL.com). It is understood and agreed that the rights and obligations of
Advertiser as set forth herein relate only to the AOL Service, AOL.com, the
CompuServe Service and Digital City, each as and to the extent applicable
hereunder, and not generally to the AOL Network.
AOL PURCHASERS. Any person or entity, (A) who at any time during a Renewal Term
registers with Advertiser as a result of a Permanent Promotion hereunder (e.g.,
through the Affiliated Advertiser Site, or otherwise through a Permanent
Promotion hereunder coming directly from the AOL Network); and (B) registering
as an Advertiser customer during the Renewal Term as a result a Permanent
Promotion of the Continued Link; provided that any person or entity who has
previously satisfied the definition of AOL Purchaser will remain an AOL
Purchaser, and any subsequent purchases by such person or entity (e.g., as a
result of e-mail solicitations or any off-line means for receiving orders
requiring purchasers to reference a specific promotional identifier or tracking
code) will also give rise to Transaction Revenues hereunder (which Transaction
Revenues shall be subject to the revenue sharing provisions hereof).
Notwithstanding the above, AOL Purchasers must transact during a linked session
from an AOL Network URL.
AOL SERVICE. The standard narrow-band U.S. version of the America Online(R)
brand service, specifically excluding (a) AOL.com or any other AOL Interactive
Site, (b) the international versions of an America Online service (e.g., AOL
Japan), (c) "ICQ," "AOL NetFind(TM)," AOL Instant Messenger(TM)" "Digital
Cities," "NetMail(TM)," "Electra", 'Thrive", "Real Fans", "Love(R)AOL",
"Entertainment Asylum", "Hometown" or any similar independent product, service
or property which may be offered by, through or with the U.S. version of the
America Online(R) brand service, (d) any programming or Content area offered by
or through the U.S. version of the America Online(R) brand service over which
AOL does not exercise complete
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operational control (including, without limitation, Content areas controlled by
other parties and member-created Content areas), (e) any yellow pages, white
pages, classifieds or other search, directory or review services or Content
offered by or through the U.S. version of the America Online(R) brand service,
(f) CompuServe, (g) any property, feature, product or service which AOL or its
affiliates may acquire subsequent to the effective date hereof and (h) any other
version of an America Online service which is materially different from the
standard narrow-band U.S. version of the America Online brand service, by virtue
of its branding, distribution, functionality, Content and services, including,
without limitation, any co-branded version of the service and any version
distributed through any broadband distribution platform or through any platform
or device other than a desktop personal computer.
AOL USER. Any user of the AOL Service, AOL.com or the AOL Network.
AOL.COM. AOL's primary Internet-based Interactive Site marketed under the
"AOL.COM(TM)" brand, specifically excluding (a) the AOL Service or CompuServe,
(b) any international versions of such site, (c) "ICQ," "AOL NetFind(TM)," "AOL
Instant Messenger(TM)," "NetMail(TM)", "Hometown(TM)" or any similar independent
product or service offered by or through such site or any other AOL Interactive
Site, (d) any programming or Content area offered by or through such site over
which AOL does not exercise complete operational control (including, without
limitation, Content areas controlled by other parties and member-created Content
areas), (e) any programming or Content area offered by or through the U.S.
version of the America Online(R) brand service which was operated, maintained or
controlled by the former AOL Studios division (e.g., Electra), (f) any yellow
pages, white pages, classifieds or other search, directory or review services or
Content offered by or through such site or any other AOL Interactive Site, (g)
any property, feature, product or service which AOL or its affiliates may
acquire subsequent to the Effective Date and (h) any other version of an America
Online Interactive Site which is materially different from AOL's primary
Internet-based Interactive Site marketed under the "AOL.COM(TM)" brand, by
virtue of its branding, distribution, functionality, Content and services,
including, without limitation, any co-branded versions and any version
distributed through any broadband distribution platform or through any platform
or device other than a desktop personal computer.
ADVERTISER INTERACTIVE SITE. Any Interactive Site (other than the Affiliated
Advertiser Site) which is managed, maintained, owned or controlled by Advertiser
or its agents.
COMPUSERVE. CompuServe Interactive Services (a subsidiary of AOL), including the
CompuServe Service, CompuServe.com and any other product or service owned,
operated, distributed or authorized to be distributed by or through CompuServe
or its affiliates worldwide (and including those properties expressly excluded
from the definitions of the CompuServe Service, including without limitation,
CompuServe-related Internet sites, "offline" information browsing products,
private labeled and co-branded versions of the CompuServe Service
CompuServe.com, or other CompuServe-operated Internet sites, international
versions of the CompuServe brand service, or CompuServe Instant Messenger).
It is understood and agreed
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that any applicable rights of Advertiser hereunder relate only to the CompuServe
Service and not generally to CompuServe.
COMPUSERVE.COM. CompuServe's primary Internet-based interactive site located at
"www.compuserve.com" and marketed under the "CompuServe.com(TM) brand,
specifically excluding (a) the CompuServe Service, (b) any international
versions of such site, (c) "CompuServe Instant Messenger(TM) ICQ," or any
similar independent product or service offered by or through such site or any
other CompuServe interactive site, (d) any programming or content area offered
by or through such site over which CompuServe does not exercise complete
operational control (including, without limitation, Content areas controlled by
other parties and member-created Content areas), (e) any yellow pages, white
pages, classifieds or other search, directory or review services or Content
offered by or through such site, (f) any property, feature, product or service
which CompuServe or its affiliates may acquire subsequent to the Effective Date,
(g) America Online, Inc., the America Online(R) brand service, AOL.com and any
independent product or service which may be offered by, through or with America
Online, Inc., and (g) any other version of a CompuServe interactive site which
is materially different from CompuServe's primary Internet-based interactive
site marketed under the "CompuServe.com" brand, by virtue of its branding,
distribution, functionality, Content and services, including, without
limitation, any private labeled or co-branded version of the site and any
version distributed through any broadband distribution platform or through any
platform or device other than a desktop personal computer.
COMPUSERVE SERVICE. The standard, narrow-band U.S. version of the CompuServe(R)
brand service, specifically excluding (a) any international versions of such
service, (b) any web-based service including "compuserve.com" or any similar
product or service offered by or through the U.S. version of the CompuServe
brand service, (c) Content areas owned, maintained or controlled by CompuServe
affiliates or any similar "sub-service," (d) any programming or Content area
offered by or through the U.S. version of the CompuServe brand service over
which CompuServe does not exercise complete or substantially complete
operational control (e.g., third-party Content areas), (e) any yellow pages,
white pages, classifieds or other search, directory or review services or
Content and (f) any co-branded or private label branded version of the U.S.
version of the CompuServe brand service, (g) any version of the U.S. version of
the CompuServe brand service which offers Content, distribution, services and/or
functionality materially different from the Content, distribution, services
and/or functionality associated with the standard, narrow-band U.S. version of
the CompuServe brand service, including, without limitation, any version of such
service distributed through any platform or device other than a desktop personal
computer and (h) any property, feature, product or service which CompuServe or
its affiliates may acquire, develop or launch subsequent to the Effective Date.
CONFIDENTIAL INFORMATION. Any information relating to or disclosed in the course
of the due diligence related to, or the negotiation and performance of the
Agreement, which is or should be reasonably understood to be confidential or
proprietary to the disclosing Party, including, but not limited to, the material
terms of this Agreement, information about AOL Members, AOL Users, AOL
Purchasers and Advertiser customers, technical processes and formulas,
PAGE 3
<PAGE> 20
source codes, product designs, sales, cost and other unpublished financial
information, product and business plans, projections, and marketing data.
"Confidential Information" will not include information (a) already lawfully
known to or independently developed by the receiving Party, (b) disclosed in
published materials, (c) generally known to the public, or (d) lawfully obtained
from any third party.
CONTENT. Text, images, video, audio (including, without limitation, music used
in synchronism or timed relation with visual displays) and other data, Services,
advertisements, promotions, links, pointers and software, including any
modifications, upgrades, updates, enhancements and related documentation.
DIGITAL CITY or DIGITAL CITIES. The standard, narrow-band U.S. version of
Digital City's local content offerings marketed under the Digital City(R) brand
name, specifically excluding (a) AOL.com or any other AOL Interactive Site, (b)
any international versions of such local content offerings, (c) "Driveway," "AOL
NetFind(TM)," "AOL Instant Messenger(TM)", "NetMail(TM)", "Hometown", or any
similar independent product or service offered by or through such local content
offerings, (d) any programming or Content area offered by or through such local
content offerings over which AOL does not exercise complete operational control
(including, without limitation, Content areas controlled by other parties and
member-created Content areas), (e) any separate programming or Content area
offered by or through such local offerings which was operated, maintained or
controlled by the former AOL Studios division (e.g., Electra), (f) any white
pages, classifieds or other search, directory or review services or Content
offered by or through such local content offerings, (g) any property, feature,
product or service which AOL or its affiliates may acquire subsequent to the
Effective Date, (h) any other version of a Digital City local content offering
which is materially different from the narrow-band U.S. version of Digital
City's local content offerings marketed under the Digital City(R) brand name, by
virtue of its branding, distribution, functionality, Content or services,
including, without limitation, any co-branded version of the offerings and any
version distributed through any broadband distribution platform or through any
platform or device other than a desktop personal computer, and (i) Digital
City-branded offerings in any local area where such offerings are not owned or
operationally controlled by AOL, Inc. or DCI (e.g., Chicago, Orlando, South
Florida, and Hampton Roads).
GROSS MARGIN. Transaction Revenues, minus, [ * ]
- ------------
IMPRESSION. User exposure to the applicable Promotion, as such exposure may be
reasonably determined and measured by AOL in accordance with its standard
methodologies and protocols.
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 4
<PAGE> 21
INTERACTIVE SERVICE. An entity offering one or more of the following: (i) online
or Internet connectivity services (e.g., an Internet service provider); (ii) an
interactive site or service featuring a broad selection of aggregated third
party interactive content (or navigation thereto) (e.g., an online service or
search and directory service) and/or marketing a broad selection of products
and/or services across numerous interactive commerce categories (e.g., an online
mall or other leading online commerce site); and (iii) communications software
capable of serving as the principal means through which a user creates, sends
and receives electronic mail or real time online messages. A list of examples of
such entities will be provided to Advertiser by AOL.
INTERACTIVE SITE. Any interactive site or area, including, by way of example and
without limitation, (i) a Advertiser site on the World Wide Web portion of the
Internet or (ii) a channel or area delivered through a "push" product such as
the Pointcast Network, interactive environment such as Microsoft's Active
Desktop or interactive television service such as WebTV.
KEYWORD or KEYWORD SEARCH TERMS. The KeywordTm online search terms made
available an the AOL Service for use by AOL Members, or the Go Word search terms
available on the CompuServe Service, combining AOL's keyword(TM) or CompuServe's
Go Word online search modifier with a term or phrase specifically related to
Visa (and determined in accordance with the terms of this Agreement).
LICENSED CONTENT. All Content offered through the Affiliated Advertiser Site
pursuant to this Agreement or otherwise provided by Advertiser or its agents in
connection herewith (e.g., offline or online promotional Content, Promotions,
etc.), including in each case, any modifications, upgrades, updates,
enhancements, and related documentation.
NETCENTER. Netscape Communications Corporation's primary Internet-based
Interactive Site marketed under the "Netscape NetcenterTM" brand, specifically
excluding (a) the AOL Service, AOL.com, the CompuServe Service, CompuServe.com,
or Digital City, (b) any international versions of such site, (c) "ICQ," "AOL
NetFind(TM)"," "AOL Instant Messenger(TM)," "NetMail(TM)", "Hometown(TM) or any
similar independent product or service offered by or through such site or any
other AOL Interactive Site, (d) any programming or Content area offered by or
through such site over which AOL does not exercise complete operational control
(including, without limitation, Content areas controlled by other parties and
member-created Content areas), (e) any programming or Content area offered by or
through the U.S. version of the America Online brand service which was operated,
maintained or controlled by the former AOL Studios division (e.g., Electra), (f)
any yellow pages, white pages, classifieds or other search, directory or review
services or Content offered by or through such site or any other AOL Interactive
Site, (g) any property, feature, product or service which AOL or its affiliates
may acquire subsequent to the Effective Date and (h) any other version of an AOL
or Netscape Communications Corporation Interactive Site which is materially
different from Netscape Communications Corporation's primary Internet-based
Interactive Site marketed under the "Netscape Netcenter(TM)" brand, by virtue of
its branding, distribution, functionality, Content and services, including,
without limitation, any co-branded versions and any version distributed
PAGE 5
<PAGE> 22
through any broadband distribution platform or through any platform or device
other than a desktop personal computer.
PERMANENT PROMOTION. Any continuous promotional placement within the Initial
Term, including, without limitation, a button, integrated contextual link or
keyword on the AOL Network. Permanent Promotions shall not include Tier 3
promotions or any non-permanent Tier 2 promotions (e.g., banners).
REMNANT INVENTORY. Inventory which is unsold at the end of the business day
prior to the day on which that inventory will run. If Advertiser has purchased
Remnant Inventory, Advertiser's creative will be slotted into such unsold
inventory by AOL from time to time in accordance with internal AOL policies. AOL
guarantees the total number of Remnant Inventory Impressions set forth in this
Insertion Order, but does not guarantee that such Impressions will be delivered
on any particular day(s) or that such Impressions will be delivered evenly over
the Term. Further, AOL does not guarantee placement on any particular screen or
group of screens (except that Channel level Remnant Inventory will be run only
within the specified Channel).
RUN OF SERVICE or ROS. A collection of inventory made up of all areas of the AOL
Service. If Advertiser ,has purchased Run of Service Inventory, AOL will place
Advertiser's creative in different locations throughout the AOL Service in
accordance with AOL internal policies. Run of Service Impressions will be
delivered reasonably evenly over the time period set forth in this Insertion
Order. Advertiser may not control placement within a Run of Service Inventory
purchase and AOL does not guarantee placement on any particular screen or group
of screens (except that Run of Channel Inventory will be run only in the
specified Channel).
SEARCH TERM or SEARCH TERM. The online search term or terms made available on
AOL.com only for use by AOL.com users using the NetFind brand search engine
thereon (the results of which such search are non-exclusive, and result in
references to many entities).
TRANSACTION REVENUES. Aggregate amounts paid by AOL Purchasers in connection
with the sale, licensing, distribution or provision of any Products in any
Advertiser Interactive Site, excluding, in each case, (a) [ * ]
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 6
<PAGE> 23
EXHIBIT C
CROSS PROMOTION
Online:
Within Advertiser's web sites on the World Wide Web portion of the Internet
(each an "Advertiser Web Site"), Advertiser shall include one or both of the
following (collectively, the "AOL Promos"): (i) a prominent promotional banner
or button subject to mutual agreement of the Parties to promote such AOL
products or services as AOL may designate (for example, the America Online(R)
brand service, the CompuServe(R) brand service, the AOL.com(R) site, any of the
Digital City" services or the AOL Instant Messenger(TM) service) which
Advertiser shall [ * ]to place "above the fold" on the first screen of the
Advertiser Web Site; or (ii) a prominent "Try AOL" feature subject to mutual
agreement of the Parties through which users can obtain promotional information
about AOL products or services designated by AOL and, at AOL's option, download
or order the then-current version of client software for such AOL products or
services. AOL will provide the creative content to be used in the AOL Promos
(including designation of links from such content to other content pages).
Advertiser shall post (or update, as the case may be) the creative content
supplied by AOL within the spaces for the AOL Promos within [ * ] of its receipt
of such content from AOL. Without limiting any other reporting obligations of
the Parties contained herein, Advertiser shall use best efforts to provide AOL
with monthly written reports specifying the number of impressions to the pages
containing the AOL Promos during the prior month. In the event that AOL and
Advertiser mutually agree to have AOL serve the AOL Promos to the Advertiser Web
Site from an ad server controlled by AOL or its agent, Advertiser shall take all
reasonable operational steps necessary to facilitate such ad serving arrangement
including, without limitation, inserting HTML code designated by AOL on the
pages of the Advertiser Web Site on which the AOL Promos will appear. In
addition, within each Advertiser Web Site, Advertiser shall provide prominent
promotion for the keywords granted to Advertiser hereunder (if any).
Offline:
In Advertiser's television, radio, print and "out of home" (e.g., buses and
billboards) advertisements and in any publications, programs, features or other
forms of media over which Advertiser possesses at least partial editorial
control, Advertiser will use best efforts to include specific and reasonably
prominent references or mentions (verbally where possible) of the
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 1
<PAGE> 24
availability of the Affiliated Advertiser Site through the AOL Service. Without
limiting the generality of the foregoing, Advertiser shall [ * ] to ensure that
all of Advertiser's listings of the "URL" for any Advertiser Web Site will be
accompanied by a reasonably prominent listing of the "keyword" term on AOL for
the Affiliated Advertiser Site.
PAGE 2
<PAGE> 25
EXHIBIT D
PRODUCTS
[ * ]
* The Parties acknowledge that, notwithstanding any provision of this Exhibit D
to the contrary, the Products shall only be promoted and offered in the manner
and to the extent permitted under this Insertion Order Agreement, including,
without limitation, Section 2(a) hereof.
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 1
<PAGE> 26
EXHIBIT E
OPERATIONS
1. Affiliated Advertiser Site Infrastructure. Advertiser will be responsible
for all communications, hosting and connectivity costs and expenses
associated with the Affiliated Advertiser Site. Advertiser will provide all
hardware, software, telecommunications lines and other infrastructure
necessary to meet traffic demands on the Affiliated Advertiser Site from the
AOL Network. Advertiser will design and implement the network between the
AOL Service and Affiliated Advertiser Site such that (i) no single component
failure will have a materially adverse impact on AOL Members seeking to
reach the Affiliated Advertiser Site from the AOL Network and (ii) no single
line will run at more than [ * ]% average utilization for a [ * ] peak in a
daily period. In this regard, Advertiser will provide AOL, upon request,
with a detailed network diagram regarding the network infrastructure
supporting the Affiliated Advertiser Site. In the event that Advertiser
elects to create a custom version of the Affiliated Advertiser Site in order
to comply with the terms of this Agreement, Advertiser will bear
responsibility for all aspects of the implementation, management and cost of
such customized site.
2. Optimization; Speed. Advertiser will use commercially reasonable efforts to
ensure that: (a) the functionality and features within the Affiliated
Advertiser Site are optimized for the client software then in use by AOL
Members; and (b) the Affiliated Advertiser Site is designed and populated in
a manner that minimizes delays when AOL Members attempt to access such site.
At a minimum, Advertiser will ensure that the Affiliated Advertiser Site's
data transfers initiate within fewer than [ * ] seconds on average. Prior to
commercial launch of any material promotions described herein, Advertiser
will permit AOL to conduct performance and load testing of the Affiliated
Advertiser Site (in person or through remote communications), with such
commercial launch not to commence until such time as AOL is reasonably
satisfied with the results of any such testing.
3. User Interface. Advertiser will maintain a graphical user interface within
the Affiliated Advertiser Site that is competitive in all material respects
with interfaces of other similar sites based on similar form technology. AOL
reserves the right to review and approve the user interface and site design
prior to launch of the Promotions and to conduct focus group testing to
assess compliance with respect to such consultation and with respect to
Advertiser's compliance with the preceding sentence.
4. Technical Problems. Advertiser agrees to use commercially reasonable efforts
to address material technical problems (over which Advertiser exercises
control) affecting use by AOL Members of the Affiliated Advertiser Site (a
"Advertiser Technical Problem") promptly following notice thereof. In the
event that Advertiser is unable to promptly resolve a Advertiser Technical
Problem following notice thereof from AOL (including, without limitation,
infrastructure deficiencies producing user delays), AOL will have the right
to regulate the promotions it provides to Advertiser
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 1
<PAGE> 27
hereunder until such time as Advertiser corrects the Advertiser Technical
Problem at issue.
5. Monitoring. Advertiser will ensure that the performance and availability of
the Affiliated Advertiser Site is monitored on a continuous basis.
Advertiser will provide AOL with contact information (including e-mail,
phone, pager and fax information, as applicable, for both during and after
business hours) for Advertiser's principal business and technical
representatives, for use in cases when issues or problems arise with respect
to the Affiliated Advertiser Site.
6. Telecommunications. The Parties agree to explore encryption methodology to
secure data communications between the Parties' data centers. The network
between the Parties will be configured such that no single component failure
will significantly impact AOL Users. The network will be sized such that no
single line runs at more than [ * ]% average utilization for a [ * ] peak in
a daily period.
7. Security. Advertiser will utilize Internet standard encryption technologies
(e.g., Secure Socket Layer - SSL) to provide a secure environment for
conducting transactions and/or transferring private member information(e.g.
credit card numbers, banking/financial information, and member address
information) to and from the Affiliated Advertiser Site. Advertiser will
facilitate periodic reviews of the Affiliated Advertiser Site by AOL in
order to evaluate the security risks of such site. Advertiser will promptly
remedy any security risks or breaches of security as may be identified by
AOL's Operations Security team.
8. Technical Performance.
i. Advertiser will design the Affiliated Advertiser Site to support the
AOL-client embedded versions of the Microsoft Internet Explorer 3.0
and 4.0 browsers (Windows and Macintosh), the Macintosh version of the
Microsoft Internet Explorer 3.0, and make commercially reasonable
efforts to support all other AOL browsers listed at:
http://webmaster.info.aol.com/BrowTable.html.
ii. To the extent Advertiser creates customized pages on the Affiliated
Advertiser Site for AOL Members, Advertiser will configure the server
from which it serves the site to examine the HTTP User-Agent field in
order to identify the "AOL Member-Agents" listed at:
http://webmaster.info.aol.com/Brow2Text.html.
iii. Advertiser will periodically review the technical information made
available by AOL at http://webmaster.info.aol.com.
iv. Advertiser will design its site to support HTTP 1.0 or later protocol
as defined in RFC 1945 and to adhere to AOL's parameters for
refreshing cached information listed at:
http://webmaster.info.aol.com.
v. Prior to releasing material, new functionality or features through the
Affiliated Advertiser Site ("New Functionality"), Advertiser will use
commercially reasonable efforts to
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 2
<PAGE> 28
either (i) test the New Functionality to confirm its compatibility
with AOL Service client software or (ii) provide AOL with written
notice of the New Functionality so that AOL can perform tests of the
New Functionality to confirm its compatibility with the AOL Service
client software.
9. AOL Internet Services Advertiser Support. AOL will provide Advertiser with
access to the standard online resources, standards and guidelines
documentation, technical phone support, monitoring and after-hours
assistance that AOL makes generally available to similarly situated
web-based partners. AOL support will not, in any case, be involved with
content creation on behalf of Advertiser or support for any technologies,
databases, software or other applications which are net supported by AOL or
are related to any Advertiser area other than the Affiliated Advertiser
Site. Support to be provided by AOL is contingent on Advertiser providing to
AOL demo account information (where applicable), a detailed description of
the Affiliated Advertiser Site's software, hardware and network architecture
and access to the Affiliated Advertiser Site for purposes of such
performance and load testing as AOL elects to conduct.
PAGE 3
<PAGE> 29
EXHIBIT F
PLACEMENT / PROMOTION
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
AFFILIATED BRANDS INCLUDED TOTAL DISPLAY START DISPLAY STOP DATE
ADVERTISER SITE IMPRESSIONS BY DATE
CARRIAGE TIER
- -----------------------------------------------------------------------------------------------
TIER 1
- -----------------------------------------------------------------------------------------------
[ * ] AOL Service, [ * ] [ * ]
AOL.com,
CompuServe
Service,
Netscape
Netcenter
- -----------------------------------------------------------------------------------------------
[ * ] AOL Service, [ * ] [ * ]
AOL.com,
CompuServe
Service,
Netscape
Netcenter
- -----------------------------------------------------------------------------------------------
[ * ] AOL Service, [ * ] [ * ]
AOL.com,
CompuServe
Service,
Netscape
Netcenter
- -----------------------------------------------------------------------------------------------
[ * ] AOL Service, [ * ] [ * ]
AOL.com,
CompuServe
Service,
Netscape
Netcenter
- -----------------------------------------------------------------------------------------------
[ * ] AOL Service, [ * ] [ * ]
AOL.com,
CompuServe
Service,
Netscape
Netcenter
- -----------------------------------------------------------------------------------------------
[ * ] AOL Service, [ * ] [ * ]
AOL.com,
CompuServe
Service,
Netscape
Netcenter
- -----------------------------------------------------------------------------------------------
</TABLE>
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 1
<PAGE> 30
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Total Tier One [ * ]
- -----------------------------------------------------------------------------------------------
TIER 2 BRANDS INCLUDED TOTAL DISPLAY START DISPLAY STOP DATE
IMPRESSIONS BY DATE
TIER
- -----------------------------------------------------------------------------------------------
[ * ] [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] AOL.com [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] AOL.com [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] Netscape [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] Netscape [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] Netscape [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] Netscape [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] CompuServe [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
Total Tier 2 [ * ]
- -----------------------------------------------------------------------------------------------
TIER 3 [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] AOL.com [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] Netscape [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] Netscape [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
[ * ] Netscape [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
</TABLE>
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 2
<PAGE> 31
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
[ * ] CompuServe [ * ] [ * ]
- -----------------------------------------------------------------------------------------------
Total Tier 3 [ * ]
- -----------------------------------------------------------------------------------------------
</TABLE>
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 3
<PAGE> 32
EXHIBIT G
AOL ADVERTISING STANDARD TERMS AND CONDITIONS (V.3)
1. Advertising Material/Display. Except as otherwise set forth in the Agreement,
Advertiser acknowledges that the sole obligation of America Online, Inc. ("AOL")
is to display an advertisement (the "Advertisement") from Advertiser which
conforms to the specifications set forth in the applicable Insertion Order
Agreement which has been executed by AOL and Advertiser (the "Insertion Order,"
and, collectively with these Standard Terms and Conditions, the "Agreement")
through the standard narrowband U.S.-based America Online brand service
(excluding any sub-products, sub-services or third party areas which may be
offered therein) or such other U.S.-based AOL property as may be expressly
described as the site for placement in the Insertion Order (the "AOL Service").
Subject to Advertisers reasonable prior written approval, AOL will have the
right to fulfill its promotional commitments with respect to the Advertisements
by providing Advertiser with comparable placements of the Advertisements in
alternative areas of the AOL Service. Except as expressly provided in the
Insertion Order, the specific nature and positioning of the Advertisement will
be as determined by AOL in its reasonable editorial discretion; AOL agrees to
make reasonable efforts to support Advertiser's promotion of Products through
factors other than price, e.g., through promotion of Advertiser's authorized
reseller status and free shipping. Advertiser agrees that (i) AOL has the right
to market, display, perform, transmit and promote the Advertisement through the
AOL Service and (ii) users of the AOL Service have the right to access and use
the Advertisement together with any content or materials linked to the
Advertisement (the "Advertiser Content"). Except as expressly permitted pursuant
to Section 17 of Exhibit A, the Advertiser Content (i) shall not offer or
promote any other products and/or services other than those expressly provided
for in the relevant Insertion Order, (ii) will link only to the site specified
on the Insertion Order and (iii) shall not (a) disparage AOL; (b) be in
contravention of AOL's generally applicable advertising standards and practices,
as such may be modified by AOL from time to time; or (c) violate any applicable
law, regulation or third party right (including, without limitation, any
copyright, trademark, patent or other proprietary right). In addition to the
foregoing, the Advertisements shall not promote any product or service which is
reasonably competitive with one or more of the principal products or services
offered by AOL through AOL's products and services ("Competitive Products"). The
Parties agree and acknowledge that none of the Products shall constitute
Competitive Products. Additionally, Advertiser shall consistently update the
Advertiser Content and will review, delete, edit, create, update and otherwise
manage such content in accordance with the terms of this Agreement. In no event
shall the Advertisement or the linked area state or imply that (I) the
Advertisement was placed by AOL or (ii) that AOL endorses Advertiser's products
or services. To the extent AOL notifies Advertiser of reasonable complaints or
concerns (e.g., from an AOL member) regarding the Advertiser Content or any
other content or materials linked thereto or associated therewith
("Objectionable Content"), Advertiser will, to the extent such Objectionable
Content is within Advertisers control, use commercially reasonable efforts to
respond in good faith to such complaints or concerns. AOL may alter or shorten
the flight dates set forth in the Insertion
PAGE 1
<PAGE> 33
Order if advertising materials required per the Insertion Order are not provided
in a timely manner, and Advertiser shall not be entitled to any refund or
proration for delays caused by Advertisers failure to deliver such materials.
2. Operations. Unless expressly provided for elsewhere in this Agreement, AOL
will have no obligation to provide any creative, design, technical or production
services to Advertiser ("Services"). Delivery by AOL of any such Services shall
be subject to (I) AOL's availability to perform the requested work, (ii)
execution by both parties of a separate work order specifically outlining the
Services to be provided and the fees to be paid by Advertiser for such Services
and (iii) payment in advance by Advertiser of such fees, in accordance with the
terms of Exhibit A. Advertiser will take use best efforts to ensure that the
Advertiser Content and the site linked to the Advertiser Content are in
compliance with AOL's then-current, generally applicable technical standards and
will take all reasonable steps necessary to conform its promotion and sale of
products through its site to the then-existing technologies identified by AOL
which are optimized for the AOL Service. In the event that the Advertiser
Content or the site linked to the Advertiser Content fails to comply with AOL's
generally applicable technical standards, AOL shall have the right to cease or
decrease the placement of the Advertisements, and if Advertiser is unable to
cure such non-compliance within [ * ] after notice from AOL, AOL shall have the
right to terminate the Agreement. Additionally, AOL will be entitled to
discontinue links to Advertiser Content to the extent such Advertiser Content
will, in AOL's good faith judgment, adversely affect the operations of the AOL
Service. In the event of discontinuance, Advertiser will be entitled to
terminate this Agreement and will be relieved of any payment obligations
hereunder, excluding the next subsequent payment due to AOL pursuant to Section
One of Exhibit A, with respect to amounts due after the date of termination.
Advertiser will bear full responsibility for all customer service, including
without limitation, order processing, billing, fulfillment, shipment, collection
and other customer support associated with any products or services offered,
sold or licensed through Advertisers site, and AOL will have no obligations
whatsoever with respect thereto. Advertiser will take all steps necessary to
ensure that any contest, sweepstakes or similar promotion conducted or promoted
through the Advertiser Content complies with all applicable federal, state and
local laws and regulations.
3. Search Terms/Keywords. To the extent Advertiser is purchasing an
Advertisement related to an Internetbased "search" term, Advertiser represents
and warrants that Advertiser has the legal rights necessary to utilize such
search term in connection with the Advertisement. Any "keyword" terms for
navigation from within the proprietary America Online brand service ("AOL
Keyword Terms") (as contrasted to Internetbased search terms) which may be made
available to Advertiser shall be (i) subject to availability and (ii) limited to
the combination of the keyword modifier combined with a registered trademark of
Advertiser. AOL reserves the right to revoke at any time Advertiser's use of any
AOL Keyword Terms which do not incorporate registered trademarks of Advertiser.
Advertiser acknowledges that its utilization of
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 2
<PAGE> 34
any AOL Keyword Term will not create in it, nor will it represent it has, any
right, title or interest in or to such AOL Keyword Term, other than the right,
title and interest Advertiser holds in Advertiser's registered trademark
independent of the AOL Keyword Term.
4. Payment; Cancellation. Subject to the provisions of Section 16 of Exhibit A,
the Impressions Commitment, Exhibit F and Sections 2, 4 and 9 of Exhibit G,
Advertiser agrees to pay AOL for all advertising displayed in accordance with
the agreed upon amounts and billing schedule shown on the relevant Insertion
Order. Advertising packages are nonrefundable or pro-ratable except to the
extent otherwise expressly contemplated hereunder. Should AOL fail to display
the Advertisements in accordance with the Insertion Order due to Advertisers
failure to comply with any material requirement of the Insertion Order or this
Agreement, Advertiser will remain liable for the full amount indicated on the
Insertion Order. AOL reserves the right to redesign or modify the organization,
structure, "look and feel" and other elements of the AOL Service at its sole
discretion at any time without prior notice. In the event such modifications
will materially and adversely affect the placement of the Advertisement, AOL
will work with Advertiser to display the Advertisement in a comparable location
and manner that is reasonably satisfactory to Advertiser. If AOL and Advertiser
cannot reach agreement on a substitute placement, Advertiser shall have the
right to cancel the Advertisement, upon [ * ] advance written notice to AOL. In
such case, Advertiser will only be responsible for the pro-rata portion of
payments attributable to the period from the commencement of the Agreement
through the effectiveness of such cancellation (the "Pro Rata Payments") and AOL
will refund to Advertiser any amounts previously paid to AOL hereunder in excess
of the Pro Rata Payments, if any. AOL reserves the right to cancel and remove at
any time any Advertisement for any reason upon [ * ] advance written notice to
Advertiser in the event that AOL believes in good faith that further display of
the Advertisement will expose AOL to liability or other adverse consequences
provided, however, that Advertiser has the ability to cure such Advertisements
to AOL's satisfaction within [ * ] of Advertiser's receipt of notice thereof;
AOL will be entitled to discontinue links to Advertiser during such cure period.
In the event of such a cancellation, Advertiser will only be responsible for the
Pro-Rata Payments. Advertiser may not resell, trade, exchange, barter or broker
to any third-party any advertising space which is the subject of this Agreement.
5. Usage Data. AOL will provide Advertiser with usage information related to the
Advertisement in substance and form determined by AOL, consistent with its
then-standard reporting practices. Advertiser may not distribute or disclose
usage information to any third party without AOL's prior written consent.
6. Limitation of Liability; Disclaimer; Indemnification. (A) SUBJECT TO SECTION
6(C) BELOW, UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE TO THE OTHER
PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 3
<PAGE> 35
OR EXEMPLARY DAMAGES (EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES), ARISING FROM ANY ASPECT OF THE ADVERTISING RELATIONSHIP PROVIDED
FOR HEREIN. SUBJECT TO SECTION 6(C), IN NO EVENT SHALL EITHER PARTY BE LIABLE TO
THE OTHER PARTY UNDER THIS AGREEMENT FOR MORE THAN [ * ] DOLLARS ($[ * ]). (B)
AOL MAKES NO AND HEREBY SPECIFICALLY DISCLAIMS ANY AND ALL REPRESENTATIONS OR
WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE AOL SERVICE, AOL.COM, THE AOL
NETWORK, THE COMPUSERVE SERVICE, NETSCAPE NETCENER OR ANY PORTION THEREOF,
INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF
PERFORMANCE. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, AOL SPECIFICALLY
DISCLAIMS ANY WARRANTY REGARDING (I) THE NUMBER OF PERSONS WHO WILL ACCESS THE
ADVERTISER CONTENT OR "CLICK-THROUGH" THE ADVERTISEMENTS, (II) ANY BENEFIT
ADVERTISER MIGHT OBTAIN FROM INCLUDING THE ADVERTISEMENT WITHIN THE AOL SERVICE
AND (III) THE FUNCTIONALITY, PERFORMANCE OR OPERATION OF THE AOL SERVICE WITH
RESPECT TO THE ADVERTISEMENTS. (C) EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN
THIS AGREEMENT, ADVERTISER MAKES NO AND HEREBY SPECIFICALLY DISCLAIMS ANY
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE ADVERTISER SITE
OR ANY PORTION THEREOF, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF
DEALING OR COURSE OF PERFORMANCE. (D) Advertiser hereby agrees to indemnify,
defend and hold harmless AOL and the officers, directors, agents, affiliates,
distributors, franchises and employees of AOL from and against all claims,
actions, liabilities, losses, expenses, damages and costs (including, without
limitation, reasonable attorneys' fees ("Liabilities") that may at any time be
incurred by any of them by reason of any claims, suits or proceedings: (a) for
libel, defamation, violation of right of privacy or publicity, copyright
infringement, trademark infringement or other infringement of any third party
right, fraud, false advertising, misrepresentation, product liability or
violation of any law, statute, ordinance, rule or regulation throughout the
world in connection with the Advertisements or Advertiser Content; or (b)
relating to any contaminated file, virus, worm or Trojan horse originating from
the Advertisements or Advertiser Content. Advertiser's counsel defending such
Action shall be subject to AOL's prior written approval. In addition to the
foregoing, each Party will defend, indemnify, save and hold harmless the other
Party and the officers, directors, agents, affiliates, distributors, franchisees
and employees of the other Party from any and all Liabilities resulting from the
indemnifying Party's material breach of any duty, representation,
or warranty of the Agreement, except where Liabilities result from the gross
negligence or knowing and willful misconduct of the other Party.
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 4
<PAGE> 36
Claims. If a Party entitled to indemnification hereunder (the "Indemnified
Party") becomes aware of any matter it believes is indemnifiable hereunder
involving any claim, action, suit, investigation, arbitration or other
proceeding against the Indemnified Party by any third party (each an "Action"),
the Indemnified Party will give the other Party (the "Indemnifying Party")
prompt written notice of such Action. Such notice will (i) provide the basis on
which indemnification is being asserted and (ii) be accompanied by copies of all
relevant pleadings, demands, and other papers related to the Action and in the
possession of the Indemnified Party. The Indemnifying Party will have a period
of [ * ] after delivery of such notice to respond. If the Indemnifying Party
elects to defend the Action or does not respond within the requisite [ * ]
period, the Indemnifying Party will be obligated to defend the Action, at its
own expense, and by counsel reasonably satisfactory to the Indemnified Party.
The Indemnified Party will cooperate, at the expense of the Indemnifying Party,
with the Indemnifying Party and its counsel in the defense and the Indemnified
Party will have the right to participate fully, at its own expense, in the
defense of such Action. If the Indemnifying Party responds within the required [
* ] period and elects not to defend such Action, the Indemnified Party will be
free, without prejudice to any of the Indemnified Party's rights hereunder, to
compromise or defend (and control the defense of) such Action. In such case, the
Indemnifying Party will cooperate, at its own expense, with the Indemnified
Party and its counsel in the defense against such Action and the Indemnifying
Party will have the right to participate fully, at its own expense, in the
defense of such Action. Any compromise or settlement of an Action will require
the prior written consent of both Parties hereunder, such consent not to be
unreasonably withheld or delayed. This section will survive the completion,
expiration, termination or cancellation of this Agreement.
7. Solicitation. (a) Advertiser will not send unsolicited, commercial e-mail
(i.e., "spam") through or into AOL's products or services, absent a prior
business relationship, and will comply with any other standard AOL policies and
limitations relating to distribution of bulk e-mail solicitations or
communications through or into AOL's products or services (including, without
limitation, the requirement that Advertiser provide a prominent and easy means
for the recipient to "opt-out" of receiving any future commercial e-mail
communications from Advertiser. Advertiser will not use the Advertisement or any
other aspect of AOL's products or services to promote or solicit on behalf of a
Competitive Product. The Parties agree and acknowledge that none of the Products
shall constitute Competitive Products. (b) Advertiser shall ensure that its
collection, use and disclosure of information obtained from AOL members under
this Agreement("Member Information") complies with (i) all applicable laws and
regulations and (ii) AOL's standard privacy policies, available on the AOL
Service at the keyword term "Privacy" (or, in the case of Advertiser's site,
Advertiser's standard privacy policies so long as such policies are prominently
published on the site and provide adequate notice, disclosure and choice to
users regarding Advertiser's collection, use and disclosure of user
information). (c) Each Information Request shall clearly and conspicuously
specify to the AOL members at issue the purpose for which specific information
related to such members
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 5
<PAGE> 37
("Member Information") collected by Advertiser shall be used (the "Specified
Purpose"). Advertiser shall limit use of the Member Information collected
through an Information Request to the Specified Purpose. In the case of AOL
members who purchase products or services from Advertiser, Advertiser will be
entitled to incorporate such members into Advertiser's aggregate lists of
customers; provided that Advertiser shall in no way: (i) disclose Member
Information in a manner that identifies AOL members as end-users of an AOL
product or service (or in any other manner that could reasonably be expected to
facilitate use of such information by or on behalf of a Competitive Product); or
(ii) otherwise use such Member Information in connection with marketing of a
Competitive Product. This section shall survive the completion, expiration,
termination or cancellation of this Agreement.
8. Confidentiality. Each Party acknowledges that Confidential Information may be
disclosed to the other Party during the course of the due diligence related to,
and the negotiation and performance of the Agreement. Each Party agrees that it
will take reasonable steps, at least substantially equivalent to the steps it
takes to protect its own proprietary information, during the term of this
Agreement, and for a period of [ * ] following expiration or termination of this
Agreement, to prevent the duplication or disclosure of Confidential Information
of the other Party, other than by or to its employees or agents who must have
access to such Confidential Information to perform such Party's obligations
hereunder, who will each agree to comply with this section. Notwithstanding the
foregoing, either Party may issue a press release or other disclosure containing
Confidential Information without the consent of the other Party, to the extent
such disclosure is required by law, rule, regulation or government or court
order. In such event, the disclosing Party will provide at least [ * ] prior
written notice of such proposed disclosure to the other Party. Further, in the
event such disclosure is required of either Party under the laws, rules or
regulations of the Securities and Exchange Commission or any other applicable
governing body, such Party will (i) redact mutually agreed-upon portions of this
Agreement to the fullest extent permitted under applicable laws, rules and
regulations and (ii) submit a request to such governing body that such portions
and other provisions of this Agreement receive confidential treatment under the
laws, rules and regulations of the Securities and Exchange Commission or
otherwise be held in the strictest confidence to the fullest extent permitted
under the laws, rules or regulations of any other applicable governing body.
9. Miscellaneous. The parties to this Agreement are independent contractors.
Neither party is an agent, representative or partner of the other party. Neither
party shall have any right, power or authority to enter into any agreement for
or on behalf of, or incur any obligation or liability of, or to otherwise bind,
the other party. The failure of either party to insist upon or enforce strict
performance by the other party of any provision of this Agreement or to exercise
any right under this Agreement shall not be construed as a waiver or
relinquishment to any extent of such party's right to assert or rely upon any
such provision or right in that or any other instance. Except where otherwise
specified herein or in the Insertion Order, the rights
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 6
<PAGE> 38
and remedies granted to a party under this Agreement are cumulative and in
addition to, and not in lieu of, any other rights or remedies which the party
may possess at law or in equity. Except as set forth in Section 15 of Exhibit A,
neither Party shall issue any press releases or public statements concerning the
existence or terms of this Agreement. Each party agrees not to use, display or
modify the other party's trademarks in any manner absent the other party's
express prior written approval. Either party may terminate this Agreement (a) at
any time with written notice to the other party in the event of a material
breach of this Agreement by the other party, which remains uncured after thirty
days written notice thereof; provided that in the event of Advertiser's failure
to make any payment to AOL required in the Insertion Order, AOL shall provide
notice to Advertiser of such failure and Advertiser shall have ten days to cure
such failure by making complete payment to AOL within [ * ] of delivery of
notice by AOL, and in the event of Advertiser's nonpayment within this cure
period, AOL reserves the right to terminate the Agreement immediately with
written notice to Advertiser thereafter, and (b) immediately following written
notice to the other party if the other party (1) ceases to do business in the
normal course, (2) becomes or is declared insolvent or bankrupt, (3) is the
subject of any proceeding related to its liquidation or insolvency (whether
voluntary or involuntary) which is not dismissed within [ * ] or (4) makes an
assignment for the benefit of creditors. Additionally, in the event of a change
of control of Advertiser, AOL may terminate this Agreement by providing [ * ]
prior written notice of such intent to terminate, and Advertiser will be
responsible for the pro-rata portion of the fee allocable to the display of the
Promotion based on the number of days that the Promotion was displayed;
provided, however, that the foregoing proration of the applicable fee owed to
AOL shall not apply in the event of a change of control of Advertiser in
connection with any third party Interactive Service. This Agreement sets forth
the entire agreement between Advertiser and AOL, and supersedes any and all
prior agreements of AOL or Advertiser with respect to the transactions set forth
herein. No change, amendment or modification of any provision of this Agreement
shall be valid unless set forth in a written instrument signed by the party
subject to enforcement of such amendment. Neither party shall assign this
Agreement or any right, interest or benefit under this Agreement without the
prior written consent of the other party, which shall not be unreasonably
withheld; provided, however, that such consent shall not be required for
internal reorganizations, reincorporations, restructurings and ordinary course
financing events which do not constitute a change of control of the assigning
party; provided, however, that Advertiser shall not be required to obtain AOL's
prior written consent in connection with an initial public offering. In addition
to the foregoing, assumption of the Agreement by any successor to Advertiser
(including, without limitation, by way of merger or consolidation) shall be
subject to AOL's prior written approval. Subject to the foregoing, this
Agreement shall be fully binding upon, inure to the benefit of and be
enforceable by the parties hereto and their respective successors and assigns.
In the event that any provision of this Agreement is held invalid by a court
with jurisdiction over the Parties to this Agreement, (i) such
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
PAGE 7
<PAGE> 39
provision shall be deemed to be restated to reflect as nearly as possible the
original intentions of the Parties in accordance with applicable law and (ii)
the remaining terms, provisions, covenants and restrictions of this Agreement
shall remain in full force and effect. This Agreement may be executed in
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same document. This Agreement shall be
interpreted, construed and enforced in all respects in accordance with the laws
of the Commonwealth of Virginia, except for its conflicts of laws principles.
Advertiser hereby irrevocably consents to the exclusive jurisdiction of the
courts of the Commonwealth of Virginia and the federal courts situated in the
Commonwealth of Virginia in connection with any action arising under this
Agreement.
PAGE 8
<PAGE> 40
FIRST AMENDMENT TO AOL ADVERTISING INSERTION ORDER
THIS FIRST AMENDMENT to AOL Advertising Insertion Order (the
"Amendment") is effective as of the 30th day of June, 1999 by and between
America Online, Inc., a Delaware corporation with offices at 22000 AOL Way,
Dulles, Virginia 20166 ("AOL"), and 800.com, Inc. with offices at 1516 Northwest
Thurman, Portland, Oregon 97209 ("Advertiser").
RECITALS
WHEREAS, AOL and Advertiser are parties to that certain AOL Advertising
Insertion Order dated as of June 30, 1999 (the "Agreement"); and
WHEREAS, the Parties desire to modify certain terms of the Agreement, as
provided below.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, AOL and Advertiser agree as
follows:
TERMS
1. DEFINED TERMS. Capitalized terms used but not otherwise defined
herein shall have the meanings given thereto in the Agreement.
2. ADDITIONAL TERMS. Section 2(a) of Exhibit A of the Agreement is
hereby amended by deleting the word [ * ] from the [ * ] line of Section [ * ],
and by deleting the word [ * ] from the [ * ] line of such Section.
3. DEFINITIONS. The definition of "AOL Network" set forth in Exhibit B
of the Agreement is hereby amended by adding the word "Netscape," to appear
after the words "CompuServe Service," in the fifth line of such definition.
4. PRODUCTS. Exhibit D to the Agreement is hereby amended by adding the
following language to appear at the end of Exhibit D:
** The Parties acknowledge that, not withstanding any provision
of this Exhibit D to the contrary, no Advertisement on the AOL
Network shall contain the term [ * ] or the term [ * ].
5. EFFECTIVENESS OF AGREEMENT. Except as expressly provided herein,
nothing in this Amendment shall be deemed to waive or modify any of the
provisions of the Agreement, or any amendment or addendum thereto. In the event
of any conflict between the Agreement, this
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
<PAGE> 41
Amendment or any other amendment or addendum thereof, the document later in time
shall prevail.
6. OTHER TERMS. Except as provided in this Amendment, all other terms
and conditions of the Agreement shall remain in full force and effect, and the
parties hereto acknowledge that such terms and conditions are in full force and
effect as of the date hereof.
7. COUNTERPARTS AND FACSIMILE DELIVERY. This Amendment may be executed
in two or more counterparts, each of which shall be deemed an original and all
of which taken together shall be deemed to constitute one and the same document.
The Parties may sign and deliver this Amendment by facsimile transmission. Each
Party agrees that the delivery of the Amendment by facsimile shall have the same
force and effect as delivery of original signature pages and that each Party may
use such facsimile signatures as evidence of the execution and delivery of the
Amendment by all Parties to the same extent that an original signature could be
used.
America Online, Inc. 800.COM, Inc.
By: /s/ Eric Keller By: /s/ Gregory L. Drew
--------------------------------- -----------------------------------
Name: Eric Keller Name: Gregory L. Drew
------------------------------ --------------------------------
Title: VP Business Affairs Title: President, CEO
----------------------------- -------------------------------
PAGE 2
<PAGE> 42
800.
com the ultimate
electronics zone
(TM)
June 30, 1999
Mr. Eric Keller
Vice President
America Online. Inc.
22000 AOL Way
Dulles, Virginia 20166
Dear Mr. Keller:
Reference is hereby made to [ * ]of the Advertising Insertion Order
dated June 30, 1999, by and between America Online, Inc. ("AOL") and 800.COM
(the "Agreement"). 800.COM hereby requests that, notwithstanding any provision
of the Agreement, AOL permit 800.COM to market consumer electronic and home
entertainment products [ * ]. 800.COM agrees not to offer any other products or
services [ * ] through the Affiliated Advertiser Site without AOL's prior
written consent, which 800.COM agrees may be withheld by AOL in its sole
discretion. 800.COM further acknowledges and agrees that AOL does not exercise
operational control over the content areas contained in the Affiliated
Advertiser Site.
Sincerely,
By: /s/ Gregory L. Drew
-----------------------------------------
Gregory L. Drew
President and Chief Executive Officer
Acknowledged and Agreed:
AMERICA ONLINE, INC.
By: /s/ Eric Keller
----------------------------------
Name: Eric Keller
--------------------------------
Title: VP Business Affairs
-------------------------------
- -------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
<PAGE> 1
EXHIBIT 10.4
BEFREE SERVICE ORDER
THIS AGREEMENT is made and entered into as of 6/14/99 (the "Effective Date") by
and between Be Free, Inc. ("Be Free"), having its principal place of business at
154 Crane Meadow Road, Suite 100, Marlborough, Massachusetts 01752, and 800.com,
Inc. ("Merchant"), having its principal place of business at 1516 NW Thurman,
Portland, Oregon 97209. In consideration of the mutual covenants and conditions
contained in this Service Order and in Be Free's standard Terms of Service in
the form attached hereto (collectively the "Agreement"), and intending to be
legally bound hereby, the parties mutually agree as follows:
1. BFAST DECLINED [ ] ACCEPTED [X]
a. Provided that Merchant has initialed or checked "Accepted" above,
Merchant agrees to the BFAST provisions of the Agreement, including the
fees outlined below, and Be Free agrees to provide the BFAST Services
detailed in Exhibit A.
b. Merchant agrees to pay Be Free a BFAST Implementation Fee of [ * ]
dollars ($[ * ]) upon execution of this Agreement and [ * ] dollars ($[
* ]) upon BFAST Program Launch.
c. Merchant agrees to pay Be Free a BFAST Service Fee each month equal to
the greater of:
(i) [ * ] percent ([ * ]%) of monthly Net Sales generated through
the Affiliate Sales Channel (for purposes of this Section, Net
Sales shall be defined as gross sales less shipping charges,
taxes and returns); or
(ii) upon BFAST Program Launch, a minimum Monthly Service Fee of $[ *
] dollars.
2. AFFILIATE SUPPORT (REQUIRES BFAST) DECLINED LEVEL I LEVEL I &
[X] SUPPORT LEVEL II
ACCEPTED [ ] SUPPORT
ACCEPTED [ ]
a. Provided that Merchant has initialed or checked the applicable
"Accepted" above, Merchant agrees to the Level I Affiliate Support
provisions or the Level I and Level II Affiliate Support provisions of
the Agreement, including the fees outlined below, and Be Free agrees to
provide the applicable Affiliate Support Services detailed in Exhibit A.
b. Upon BFAST Program Launch, Merchant agrees to pay Be Free a Level I
Affiliate Support Fee of [ * ] ($[ * ]) per Affiliate per month for the
first six (6) months, and [ * ] ($[ * ]) per Affiliate per month for all
subsequent months.
c. Upon BFAST Program Launch, Merchant agrees to pay Be Free a Level II
Affiliate Support Fee of [ * ] dollars ($[ * ]) per month.
3. AFFILIATE APPLICATION REVIEW (REQUIRES BFAST) DECLINED [X]ACCEPTED [ ]
a. Provided that Merchant has initialed or checked "Accepted" above,
Merchant agrees to the Affiliate Application Review provisions of the
Agreement, including the fees outlined below, and Be Free agrees to
provide the Affiliate Application Review Services detailed in Exhibit A.
b. Upon BFAST Program Launch, Merchant agrees to pay Be Free an Affiliate
Application Review Fee of [ * ] dollars ($[ * ]) per Affiliate
application.
4. AFFILIATE CHECK WRITING (REQUIRES BFAST) DECLINED [X] ACCEPTED [ ]
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
<PAGE> 2
a. Provided that Merchant has initialed or checked "Accepted" above,
Merchant agrees to the Affiliate Check Writing provisions of the
Agreement, and provided that Merchant has transferred to Be Free amounts
owed to Affiliates by Merchant for BFAST-monitored transactions, Be Free
agrees to provide the Affiliate Check Writing Services detailed in
Exhibit A.
b. Merchant agrees to pay Be Free an Affiliate Check Writing Fee of [ * ]
($[ * ]) plus actual postage costs for each check distributed.
5. OPEN AFFILIATE OUTREACH & FASTAPP DECLINED [ ] ACCEPTED [X]
(REQUIRES BFAST) Provided that Merchant has initialed or checked
"Accepted" above, Merchant agrees to the Open Affiliate Outreach and
FastApp provisions of the Agreement, and provided that Merchant is
participating in the Be Free FastApp program, Be Free agrees to provide
the Open Affiliate Outreach and FastApp Services detailed in Exhibit A.
6. BFIT AD SERVING & AD TRAFFICKING DECLINED [ ] AD SERVING AD SERVING
ACCEPTED [X] &
AD
TRAFFICKING
ACCEPTED [ ]
a. Provided that Merchant has initialed or checked the applicable
"Accepted" above, Merchant agrees to the BFIT Ad Serving provisions or
the BFIT Ad Serving and Ad Trafficking provisions of the Agreement,
including the fees outlined below, and Be Free agrees to provide the
applicable BFIT Services detailed in Exhibit A.
b. Merchant agrees to pay Be Free a BFIT Ad Serving Fee of [ * ] ($[ * ])
per one thousand BFIT Impressions (advertisements) served.
c. Merchant agrees to pay Be Free a BFIT Ad Trafficking Fee of [ * ]
($[ * ]) per one thousand BFIT Impressions (advertisements) served.
AGREED AND ACCEPTED BY BE FREE: AGREED AND ACCEPTED BY MERCHANT:
By: Stephen M. Joseph By: Jeanette Slepian
------------------------------- ---------------------------------
Name: /s/ Stephen M. Joseph Name: /s/ Jeanette Slepian
----------------------------- -------------------------------
Title: CFO Title: VP Business Development
---------------------------- ------------------------------
Date: Date:
----------------------------- -------------------------------
* Portion has been omitted pursuant to a confidential treatment request and
filed separately with the Commission.
<PAGE> 3
BEFREE TERMS OF SERVICE
1. DEFINITIONS
1.1 "Affiliate" shall mean the person or entity that displays Merchant's
products, services and/or promotions on its internet site in exchange
for receiving remuneration from Merchant for such display.
1.2 "Affiliate Sales Channel" shall mean Merchant's group of Affiliates and
related Affiliate Sites.
1.3 "Affiliate Site" shall mean the Affiliate's internet site or sites which
display products, services, and/or promotions provided by Merchant.
1.4 "BFAST Impression" shall mean a form of information display code on an
Affiliate Site that generates a transactional request to the BFAST
service bureau each time an End User views a listing or display of
merchandise or service offered by Merchant on an Affiliate Site
(typically, this will result in the display of a product graphic or an
invisible graphic from the BFAST service bureau).
1.5 "BFAST Program Launch" shall mean the first date upon which Merchant
receives a BFAST Affiliate application.
1.6 "BFIT Impression" shall mean a form of information display code on an ad
site that generates a transactional request to the BFIT service bureau
each time an End User views an advertisement offered by Merchant on an
Affiliate Site (typically, this will result in the display of a graphic
from the BFIT service bureau).
1.7 "End User" shall mean a person or entity who visits the Affiliate Site.
1.8 "End User Clickthrough" shall mean the event caused by an End User
clicking or otherwise activating a BFAST or BFIT Impression (typically,
this will result in the link to and display of a page on the Merchant's
internet site).
2. TERM AND TERMINATION
2.1 This Agreement will begin on the Effective Date and end one year from
(i.) the BFAST Program Launch or; (ii.) if Merchant has not accepted
BFAST, the first date when a BFIT Impression is served ("Term"). The
Agreement will automatically renew for additional one year periods
("Additional Terms") unless terminated in writing by either party before
ninety (90) days prior to the end of the Term or Additional Terms.
2.2 Provided that a party is not in default of any payment or other material
breach, that party may terminate this Agreement upon sixty (60) days
written notice upon any breach or default of a material provision by the
other party. For purposes of this Section, a material breach of the
performance specifications in Section 3 shall be defined as Be Free's
failure to provide those specifications for a period of seventy-two (72)
consecutive hours, unless such failure is caused by circumstances beyond
Be Free's reasonable control as detailed in Section 8.5. Any
<PAGE> 4
termination under this Section 2.2. shall become effective at the end of
the sixty (60) day notice period unless the party in violation cures the
breach or default, or has commenced reasonable efforts to cure the
breach or default within such period.
2.3 If this Agreement expires under Section 2.1 or terminates under Section
2.2, neither party shall not have any obligation to the other party to
compensate them for damages of any kind, including loss of actual or
expected income, except as expressly set forth in Section 8.4 of this
Agreement. Both parties, for themselves and their employees, agents, and
consultants, waive any rights not granted by this Agreement that would
otherwise be exercisable under the laws or regulations of any
jurisdiction. Both parties hereby indemnify and hold the other party
harmless from and against any and all liabilities relating to any claim
or demand by the other party's employees, agents, and consultants.
Sections 2.3, 6, 7, 8.4, 8.5 and 8.6 shall survive the termination or
expiration of this Agreement.
3. BE FREE PERFORMANCE SPECIFICATIONS
Be Free's BFAST and/or BFIT services shall respond to impression
requests at a rate equal to or greater than the expected peak request
rate with a first-byte latency of less than ninety-five hundredths
(0.95) of a second. as measured at its router nearest its internet point
of presence. Due to the complexity of the Internet, the variability of
user hardware and software capabilities and the provision of services to
End Users by various providers, Be Free cannot and does not guarantee
end-to-end response times or transmission rates.
4. MERCHANT OBLIGATIONS
Merchant shall (i.) accept and record a transaction identifier for each
End User Clickthrough passed from the BFAST and/or BFIT Services; (ii.)
not less than once each business day, provide Be Free with a transaction
file, in accordance with Be Free specifications and via an approved
method, that includes sales (or other services offered by Merchant)
orders, returns or refunds, and the related transaction identifier; and
(iii.) on a regular basis, provide Be Free with a catalog file, in
accordance with Be Free's specifications and via an approved method,
that accurately reflects the merchandise available on the Merchant's
internet site.
5. PAYMENTS AND PERFORMANCE DISCOUNTS
5.1 Should Be Free fail to serve BFAST Impressions in accordance with the
performance specifications in Section 3 for a period of greater than
sixty (60) minutes during any calendar day, whether consecutive or
non-consecutive, Be Free shall discount fees specified in Section
1.c.(i.) of the Be Free Service Order for that calendar day by five
percent (5%).
5.2 Unless otherwise specified in the Be Free Service Order, all fees are
due in accordance with the payment terms stated on Be Free's invoice. At
Be Free's sole discretion, any late amounts may be subject to a 1.5% fee
each month. Merchant shall be responsible for all taxes with respect to
the transactions contemplated hereunder (except any income taxes of Be
Free).
<PAGE> 5
6. OWNERSHIP
6.1 Notwithstanding any other provision in this Agreement, Be Free and
Merchant shall be the sole and exclusive owners of their respective
intellectual property, including, without limitation, technology,
trademarks, service marks, trade names, patents, copyrights, trade
secrets and confidential information. Neither party shall use the
intellectual property of the other without the prior express written
permission of the owner.
6.2 Notwithstanding any other provision in this Agreement, Be Free shall be
the sole and exclusive owner of all affiliate technology, including
BFAST and BFIT software and their configuration for Merchant.
6.3 Notwithstanding any other provisions of this Agreement, (i.) Merchant
shall be the sole and exclusive owner of specific names, addresses,
transactional data and other personal identifying information of End
Users and (ii.) Be Free shall have the right to use general demographic
and non-personally-identifying information of End Users provided however
that any such use does not identify Merchant as the source of any such
data.
7. CONFIDENTIALITY
7.1 Each party acknowledges that during the Term or any Additional Terms of
this Agreement, it may obtain access to trade secrets and confidential
business information of the other party. A trade secret generally
consists of valuable, secret information or ideas that a party collects
or uses in order to keep its competitive edge. Trade secrets include,
without limitation, system designs, program materials (including source
and object code and any system documentation which has not been publicly
distributed or disclosed), operating processes, equipment design,
product specifications, and any other proprietary technology.
Confidential business information, which a party also treats as
proprietary, consists of all other competitively sensitive information
kept in confidence by a party. Confidential business information
includes, without limitation, contract terms, selling and pricing
information and procedures.
7.2 Each party agrees not to use or disclose any trade secrets or
confidential business information of the other party, except as may be
necessary to employees of a party who have a specific need to know in
order to coordinate the operation of Merchant's Affiliate Sales Channel
and, specifically, shall not disclose any trade secret or confidential
business information at any time to any third party without the prior
express written permission of the owner of such trade secret or
confidential business information. These restrictions do not apply to
any information that is or becomes generally available to the public or
any information properly obtained from a completely independent source.
7.3 Merchant, for itself and its employees, agents, and consultants, agrees
not to attempt in any manner to enter into, decompile or
reverse-engineer the source code of Be Free's software or to allow any
other individual(s) or entity(ies) to do or attempt to do so.
8. MISCELLANEOUS
8.1 During the Term or any Additional Terms of this Agreement, Be Free shall
be the sole provider of affiliate serving technology to Merchant.
However, notwithstanding any other provision in
<PAGE> 6
this Agreement, Merchant may participate in a network established by a
third party for the purpose of creating an affiliate sales channel
linking the third party's group of affiliates with an aggregated group
of merchants.
8.2 The parties agree to announce this Agreement shortly after the its
execution. Each party shall have the right to approve the other party's
announcement before it is made public, which approval shall not
unreasonably be withheld.
8.3 This Agreement is not assignable by either party, except that either
party may assign this Agreement in the event of its merger or
acquisition, and then only to the merged or acquiring company.
8.4 It is expressly agreed that, in the event of any breach or purported
breach of this Agreement, the remedy shall be limited to an action at
law for money damages, if any were actually suffered, and exclude
consequential and incidental damages. All rights shall be deemed to be
cumulative and the waiver a breach of any provision of this Agreement
shall not operate or be construed as a waiver of any subsequent breach.
8.5 Neither party shall be liable to the other party for any delay or
default hereunder to the extent due to any cause beyond its reasonable
control if such party notifies the other of the cause and the expected
duration of such delay or default. All such obligations shall return to
full force and effect upon the termination of such cause. A "cause
beyond the reasonable control" of a party includes any act of God, act
of any government authority, industrial dispute, fire, explosion,
accident, power failure, flood, riot or war (declared or undeclared).
8.6 This Agreement is the entire agreement between the parties regarding its
subject matter, supersedes any other agreements or understandings
between them, and may only be amended by a writing signed by both
parties. A party's waiver of, or failure to enforce, any right hereunder
on one occasion shall not be deemed a waiver of any other right on the
same occasion or the same right on any other occasion. If a court having
competent jurisdiction declares any provision of this Agreement invalid
or unenforceable, the remainder of this Agreement shall continue in full
force and effect. This Agreement shall be construed and governed
according to the laws of Commonwealth of Massachusetts applicable to
contracts made, and fully performed, in Massachusetts.
<PAGE> 7
BEFREE SERVICE ORDER
EXHIBIT A -- SERVICES
1. BFAST SERVICES
a. BFAST (Be Free Affiliate Serving Technology(TM)) Services establish,
operate and report on an Affiliate Sales Channel and include (i.)
internet access to Be Free's BFAST service bureau; (ii.) a Merchant
graphical user interface (GUI) license; (iii.) an internet browser based
Affiliate interface (reporting.net); and (iv.) implementation, training
and support functions.
b. The BFAST service bureau includes Affiliate Sales Channel transactional
services for the (i.) serving of BFAST Impressions; (ii.) directing End
Users from the Affiliate Site to the Merchant's internet site; and
(iii.) tracking and reporting of BFAST impressions, End User
Clickthroughs and sales (or other services offered by Merchant).
c. The BFAST Merchant GUI includes tools to (i) approve or reject Affiliate
applications; (ii.) approve, reject or modify Affiliate commission
voucher data; (iii.) modify links available to Affiliates on
reporting.net; (iv.) modify Affiliate profiles; (v.) access Affiliate
Sales Channel reports; and (vi.) download certain Affiliate Sales
Channel data. The BFAST Merchant GUI license is a non-exclusive,
non-transferable license to use the BFAST GUI software for use with
Merchant's Affiliate Sales Channel activities anticipated by the
Agreement during the Term or any Additional Terms. Such license includes
all related software and documentation delivered to Merchant.
d. The internet browser based Affiliate interface (reporting.net) is a
Merchant-branded site that includes tools to (i.) allow Affiliates to
generate links to the Merchant's internet site; (ii.) modify certain
Affiliate account data; and (iii.) access Affiliate activity reports and
productivity tips and techniques.
e. BFAST implementation and training includes the installation of the BFAST
Merchant GUI, and training on and assistance with the initial setup of
the (i.) Merchant's profile; (ii.) Affiliate application template;
(iii.) Affiliate commission structure (including commission rate,
payment frequency and minimum payment levels); (iv.) security (password)
configuration; (v.) reporting.net site configuration; and (vi.) Merchant
transaction and catalog output files.
f. BFAST support is provided to Merchant by an assigned Client Development
Manager (CDM) and is available Mondays through Fridays from 8:30 am to
5:30 pm ET. The CDM will provide support services including (i.) project
coordination for implementation and training; (ii.) ongoing coordination
of any necessary Be Free resources; (iii.) technical issue resolution
and trouble-shooting; (iv.) communication and support for product
enhancements; (v.) Affiliate Sales Channel analyses, and (vi.)
communication of Affiliate Sales Channel best practices tips and
techniques.
2. LEVEL I AFFILIATE SUPPORT AND LEVEL II AFFILIATE SUPPORT SERVICES
a. Level I Affiliate Support includes the following technical and marketing
support services including (i.) assisting potential Affiliates with
application completion; (ii.) assisting Affiliates
<PAGE> 8
with link generation; (iii.) assisting Affiliates with the resolution of
broken links; (iv.) logging all emails and tracking known Affiliate
issues; (v.) responding to Affiliate e-mails within one (1) business
day; (vi.) developing a set of Affiliate frequently asked questions
(FAQs) and an answer data base; (vii.) escalating Affiliate issues to
the appropriate contacts in Merchant's organization; (viii.) notifying
Affiliates of product enhancements; (ix.) corresponding with inactive
Affiliates to remind them of how to set up links; (x.) providing
Merchant with monthly summaries of outstanding and resolved issues and
statistics including type and frequency; (xi.) assisting with the
interpretation of Affiliate reports; and (xii.) responding to Affiliate
requests to assist with improving sales (or other services offered by
Merchant).
b. Level II Affiliate Support is a marketing enhancement service that
includes corresponding with the top two percent (2%) or two hundred and
fifty (250) sites, whichever is less, to (i.) notify them of Merchant
developed promotions such as seasonal offerings, new Affiliate offerings
and new product offerings; (ii.) recommend sales enhancement techniques
and best selling methods; and (iii.) ensure that they understand and use
Affiliate generated reports to maximize their traffic and sales (or
other services offered by Merchant).
3. AFFILIATE APPLICATION REVIEW SERVICES
Affiliate Application Review Services include (i.) reviewing Affiliate
applications for completeness and communicating any omitted information; (ii)
reviewing Affiliate Site (at the time of the Affiliate application) for
appropriateness based on written Merchant guidelines; (iii.) approving or
rejecting application based on written Merchant guidelines; (iv.) corresponding
with Affiliate applicants to inform them of acceptance or rejection; (v.)
providing Merchant with monthly summaries of number of applications reviewed,
approved and rejected and the most common reasons for rejection.
4. AFFILIATE CHECK WRITING SERVICES
Affiliate Check Writing Services include the processing of Affiliate commission
payments. Commission vouchers are generated by the BFAST service bureau based on
guidelines and time periods established by Merchant in the BFAST Merchant GUI
and are approved by Merchant in the GUI. After receipt of funds from Merchant,
Be Free will print, stuff and mail commission checks to Affiliates. A
transaction log will be provided to Merchant for
[REMAINDER OF TEXT CUT OFF ON COPY]
5. OPEN AFFILIATE OUTREACH AND FASTAPP SERVICES
Open Affiliate Outreach Services include initiatives by Be Free to expand the
Affiliate Sales Channel through various Affiliate recruitment programs.
Affiliates recruited by Be Free on behalf of Merchant may be provided the option
of joining other Be Free customers' affiliate sales channels through FastApp, a
consolidated Be Free-branded on-line Affiliate application form and, if
requested by the Affiliate, through direct solicitation by Be Free.
6. BFIT AD SERVING AND AD TRAFFICKING SERVICES
a. BFIT (Be Free Intelligent Targeting) Ad Serving Services serve BFIT
Impressions to one or more internet sites and include (i.) internet
access to Be Free's BFIT service bureau; (ii.) a
<PAGE> 9
Merchant graphical user interface (GUI) license; (iii.) an internet
browser based interface for ad sites (reporting.net); and (iv.)
implementation, training and support functions.
b. The BFIT service bureau includes advertisement services for the (i.)
serving of BFIT Impressions based on Merchant identified criteria (such
as internet site, End User browser or operating system, and date and
time of day); (ii.) directing End Users from the ad site to the
Merchant's internet site; and (iii.) tracking and reporting of BFIT
Impressions, End User Clickthroughs and, provided Merchant has accepted
the BFAST provisions of the Agreement, sales (or other services offered
by Merchant).
c. The BFIT Merchant GUI includes tools to (i.) manage ad campaigns and ad
series; (ii.) access advertising management and revenue reports; and
(iii.) download certain advertising data. The BFIT Merchant GUI license
is a non-exclusive, non-transferable license to use the BFIT GUI
interface software for use with Merchant's ad serving activities
anticipated by the Agreement during the Term or any Additional Terms.
Such license includes all related software and documentation delivered
to Merchant.
d. The internet browser based interface for the ad sites (reporting.net) is
a Merchant-branded site that includes tools to allow ad sites to access
advertising reports.
e. BFIT implementation and training includes the installation of the BFIT
Merchant GUI, and training on and assistance with the initial setup of
(i.) the Merchant's profile; (ii.) the ad campaign and ad series
template; (iii.) the security (password) configuration; and (iv.) the
reporting.net site.
f. BFIT support is provided by an Advertising Coordinator or, if Merchant
has accepted the BFAST provisions of the Agreement, an assigned Client
Development Manager (CDM). BFIT support is available Mondays through
Fridays from 8:30 am to 5:30 pm ET. The Advertising Coordinator or CDM
will provide support services including (i.) project coordination for
implementation and training; (ii.) ongoing coordination of any necessary
Be Free resources; (iii.) technical issue resolution and
trouble-shooting; (iv.) communication and support for product
enhancements; and (v.) advertising analyses.
g. BFIT Ad Trafficking Services include the (i.) coordination of Merchant's
ad campaign information, media plans and insertion orders; (ii.)
creation and distribution of BFIT Impression links to ad sites; (iii.)
scheduling and monitoring of ad site activity and ad performance; and
(iv.) distribution of activity reports for BFIT Impressions, End User
Clickthroughs and, provided Merchant has accepted the BFAST provisions
of the Agreement, sales (or other services offered by Merchant).
<PAGE> 1
EXHIBIT 10.5
LEASE AGREEMENT
DATED: As of the 1st day of March, 1999
BETWEEN: Bridgetown Development Company, II, L.L.C., an Oregon
limited liability company "Lessor"
AND: 800.COM, Inc., an Oregon corporation, doing business as
800.COM "Lessee"
1. PREMISES.
Lessor, being the lawful owner of the following described property,
hereby leases to Lessee, and Lessee hereby leases from Lessor, for the term and
on the terms and conditions hereinafter set forth, that portion of a building
(the "Building"), more particularly described on Exhibit "A" attached hereto and
made a part hereof, together with all improvements now or hereinafter located
thereon, if any (hereinafter collectively referred to as the "Premises").
2. OCCUPANCY.
2.1 Original Term. The term of this lease shall be for a term of five
(5) years, beginning March 1, 1999 (the Lease Commencement Date").
2.2 Option Term. Lessee is granted the option to extend the term of this
Lease for two additional five (5) year terms on the same terms and conditions as
the initial term of this Lease, except as to annual Minimum Rent, which shall be
equal to the Fair Market Rent for the Premises. Each of Lessee's options shall
be exercised by written notice provided by Lessee to Lessor not less than one
hundred twenty (120) days prior to the commencement of each Option Term. "Fair
Market Rent" shall mean the rent being charged for comparable space in Multnomah
County, Oregon, with similar amenities and fixtures. Fair Market Rent as of the
date of each Option Term shall be determined by Lessor with written notice (the
"Notice") given to Lessee not later than thirty (30) days after receipt of the
Lessee's exercise notice, subject to Lessee's right to arbitration as
hereinafter provided. If Lessee disputes the amount claimed by Lessor as Fair
Market Rent, Lessee may require that Lessor submit the dispute to final and
binding arbitration in Portland, Oregon, as described below. Failure on the part
of Lessee to demand arbitration within thirty (30) days after receipt of the
Notice from Lessor shall bind Lessee to the Fair Market Rent determined by
Lessor. In determining the Fair Market Rent by arbitration, Lessor and Lessee
shall
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<PAGE> 2
each request a real estate professional, licensed in Oregon, to calculate the
Fair Market Rent. Lessor and Lessee shall use these two calculations as a basis
for agreeing to the Fair Market Rent. If Lessor and Lessee cannot agree upon the
Fair Market Rent within ten (10) days after receipt of both calculations, then
the two real estate professionals shall jointly choose a third real estate
professional and the decision of the majority of the real estate professionals
as to the Fair Market Rent shall be binding on the parties.
3. RENT.
3.1 Minimum Rent. Lessee shall pay minimum rent (the "Minimum Rent)
pursuant to the following schedule: (a) From May 15, 1999, as defined below,
through August 1, 1999 Lessee shall pay Minimum Rent in the amount of $18,666
per month; (b) Beginning September 1, 1999 and continuing through April 1, 2000
Lessee shall pay $14.50 per square foot per year for "Space 1" as outlined on
Exhibit "A" and $8.00 per square foot per year for "Space 2" as outlined on
Exhibit "A"; (c) For Lease Year 2 (from May 1, 2000 through April 1, 2001):
$14.94 per square foot per year for "Space 1" and $8.24 per square foot per year
for "Space 2"; (d) For Lease Year 3: $15.39 per square foot per year for "Space
1" and $8.49 per square foot per year for "Space 2"; (e) For Lease Year 4:
$15.85 per square foot per year for "Space 1" and $8.74 per square foot per year
for "Space 2"; and (f) For Lease Year 5: $16.33 per square foot per year for
"Space 1" and $9.00 per square foot per year for "Space 2". Square footage shall
be determined by Lessor's architect by the Rent Commencement Date by measuring
the floor area of the leased premises to the interior surface of exterior walls.
In the event Lessee determines and notifies Lessor within thirty (30) days after
the Lease Commencement Date that the floor area of the leased premises is at
variance with the square footage determination of Lessor's architect, the
parties shall attempt to agree on the appropriate square footage determination.
If the parties are unable to agree upon the square foot area of the leased
premises, Lessor's and Lessee's architects shall appoint a third architect
within thirty (30) days after Lessor or Lessee so direct and such third
architect shall measure the leased premises and its determination shall be
binding upon the parties. Adjustments shall be made utilizing the third
architect's determination. Each of the parties shall pay the fees of its own
architect and one-half (1/2) of the third architect's fees. Minimum Rent shall
be payable in advance in equal monthly installments on the first day of each
month during the term of this Lease or the Option Term, provided, that if the
Rent Commencement Date is a day other than the first day of a month, Lessee
shall, on the Rent Commencement Date, pay rent for the balance of said month,
prorated at said monthly rate, based on the actual number of days remaining in
such month. Minimum Rent shall commence May 15, 1999 (the "Rent Commencement
Date").
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<PAGE> 3
3.2 Additional Rent. All tax, utility and CAM charges, which Lessee is
required to pay by this lease, and any other sum which Lessee is required to pay
to Lessor or third parties shall be additional rent. All additional rent charges
shall be paid monthly by Lessee, beginning March 1, 1999.
4. TAXES AND ASSESSMENTS.
4.1 Lessee's Personal Property Taxes. Lessee shall pay, when due and
payable, any and all taxes, assessments, license fees and public charges levied,
assessed or imposed at any time and which become payable during the term of this
Lease upon Lessee's trade fixtures, equipment, furniture, inventories of
merchandise, and any other personal property installed or located on the
Premises, whether or not such assessment is made against Lessee or against
Lessor, either separately or as part of the assessment of the building that
includes the Premises.
4.2 Property Taxes. During the entire term hereof, Lessee shall pay to
Lessor all Property Taxes for the Building and the Adjoining Property, as
described on Exhibit "A". Lessee shall be required to pay only of such Property
Taxes as are applicable to the term of the Lease from the Lease Commencement
Date to the Lease Termination Date.
4.3 Tax statements shall be immediately sent by Lessor to Lessee for
payment of Property Taxes as they become due. Lessor agrees to pay Property
Taxes prior to delinquency.
4.4 The term "Property Taxes" shall include all real and personal
property taxes, assessments, and other governmental charges, general and
special, ordinary, and extraordinary, of any kind and nature whatsoever levied
by any governmental authority against the land and improvements on the Building
and Adjoining Property and any personal property used in its operation,
maintenance and repair, and all reasonable costs and expenses incurred by Lessor
in attempts to obtain reductions in such taxes or assessments. Property Taxes
includes, without limitation, assessments for public improvements or benefits
which are levied, assessed or imposed during the term of this Lease, and which
become a lien on the Building or only part thereof, together with any taxes upon
rentals payable by Lessee hereunder if such taxes are substituted in whole or in
part for presently existing ad valorem real property taxes but only to the
extent to which such taxes upon rentals are substituted for said real property
taxes. However, "Property Taxes" shall not include any franchise, excise, gift,
estate, inheritance, succession, capital levy or transfer tax of Lessor in
connection with this Lease or Lessor's rights in the Premises, or any income,
excess profits or revenue tax, charge or levy against Lessor upon the business,
sales or operations of Lessor. Property Taxes shall only include special
assessments provided that (i) any such assessment is paid
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<PAGE> 4
over the longest period of time permitted by law, or, if not, the amount payable
by Lessee in any tax year for such assessment shall be no greater than the
amount that would have been payable by Lessee had the assessment been payable
over the longest period of time permitted; and (ii) any such special assessments
shall relate to improvements which directly benefit the occupants and Lessees of
the Building which 'includes the Premises.
5. USE OF THE PREMISES.
5.1 Permitted Use. The Premises shall be used for the conduct of
Lessee's online retail electronics business, other retail uses, office use,
warehousing, shipping, receiving, and other ancillary functions and for a food
service operation that provides online access and for no other purpose.
5.2 Restrictions on Use. In connection with use of the Premises Lessee
shall:
A. Conform to all applicable laws and regulations of any public
authority affecting the Premises and use thereof and correct at Lessee's
own expense any failure of compliance created through Lessee's fault or
by reason of Lessee's use, but Lessee shall not be required to make any
structural changes to effect such compliance unless such changes are
required because of Lessee's specific use. If federal, state or local
authorities do not permit Lessee's use, this Lease shall be null and
void.
B. Refrain from any activity which would make it impossible to
insure the Premises against casualty.
C. Refrain from any use other than presently conducted which
would be reasonably offensive to other Lessees or owners or users of
neighboring premises or which would tend to create a nuisance or damage
the reputation of the Premises.
D. Refrain from loading the floors beyond the point considered
safe by a competent engineer or architect selected by Lessor.
E. Refrain from making any marks on or attaching any sign,
insignia, antenna, aerial, or other device to the exterior or interior
walls, windows, or roof of the Premises without the written consent of
Lessor, except that Lessee shall be entitled to erect signs on the
Premises, subject to Lessor's advance prior written approval, which
approval shall not be unreasonably withheld, conditioned or delayed.
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<PAGE> 5
5.3 Inspection of the Premises. Lessor or its agents may 'inspect the
Premises at any reasonable time upon not less than 24 hours' notice and shall be
entitled in the case of emergency to enter the Premises at any time for the
purpose of preserving the Premises from damage.
5.4 Parking. During the term of this Lease (except to the extent
affected by timely completion of the parking lot and by Lessor's reasonable
requirement for short term parking on the Adjoining Property), Lessor agrees to
provide and maintain, at no charge to Lessee, fifty (50) spaces in the Adjoining
Property. Lessor's reasonable short term parking needs shall not require, under
any circumstances, a relocation of more than twenty-five (25) parking spaces
from the Adjoining Property, In the event of such relocation, replacement
parking shall be provided within a two and one-half (2-1/2) block radius of the
Premises for Lessee's use at no charge to Lessee. The parking is shown on
attached Exhibit "A."
5.5 Use. Lessor warrants that the Premises shall comply with the
building code and the Americans with Disabilities Act as of the Lease
Commencement Date. The parties agree to use their best efforts to cause the
completion of the work described in the contract attached hereto as Exhibit "B"
on or before April 15, 1999.
6. COMMON AREA MAINTENANCE ("CAM")
6.1 Lessee shall pay CAM expenses to Lessor as provided herein. CAM
expenses shall include all of Lessor's cost for operations, insuring with all
risk casualty insurance at full replacement cost (which Lessor agrees to
maintain during the term of this Lease), managing, administering, maintaining,
cleaning, repairing, and replacing the Building and Adjoining Property,
including, but not limited to, water and sewer charges the cost of natural gas
and electricity provided to the Building, janitorial and cleaning supplies and
services; administration costs and management fees that do not exceed fifteen
percent (15%) of annual CAM expenses; superintendent fees; security services, if
any; insurance premiums, licenses, permits for the operation and maintenance of
the Building and all of its component elements and mechanical systems except for
elevator costs or repairs; the annual amortized capital improvement cost
(amortized over such a period as Lessor may select but not shorter than the
period allowed under the Internal Revenue Code and at a current market interest
rate) for any capital improvements to the Building required by any governmental
authority or those which have a reasonable probability of improving the
operating efficiency of the Building. Lessor agrees to maintain the common area
in good repair, to keep such area clean, to remove snow and ice therefrom, to
keep such area lighted during hours of darkness when the Premises are open for
business and to keep the parking area properly striped to assist in the orderly
parking of cars.
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<PAGE> 6
In the event Lessor shall fail to commence required maintenance and/or
repairs to the common area within thirty (30) days after receipt of Lessee's
written notice of the need for such repairs and diligently pursue such repairs
to completion, Lessee may commence to perform said maintenance and/or repairs.
In the event Lessor fails to pay any contractor within thirty (30) days after
receipt of an invoice for any such repairs, Lessee may pay such contractor and
deduct said amount from rent.
CAM expenses for the calendar year in which the Lease Termination Date
occurs shall be prorated for that calendar year on a 365 day basis.
6.2 Commencing on the first day of each calendar month throughout the
term of this Lease beginning March 1, 1999, Lessee shall pay to Lessor along
with rent Lessee's percentage share of the CAM expenses as reasonably estimated
by Lessor.
6.3 Within sixty (60) days following the end of any calendar year,
Lessor shall furnish Lessee a statement covering the year just expired,
certified as correct by an authorized representative of Lessor, setting forth
the total CAM expenses in reasonable detail. If Lessor's payments of such CAM
expenses exceed Lessee's payments so made, Lessee shall pay to Lessor the
deficiency within thirty (30) days after receipt of said statement. If the
Lessee's payments exceed Lessor's CAM expenses, Lessor shall pay Lessee the
excess amount within thirty (30) days after receipt of such statement.
6.4 Disputes. If Lessee disputes any computation of CAM charges under
this Lease, it shall give written notice to Lessor within sixty (60) days after
the computation is sent to Lessee. If Lessee fails to give such written notice,
the computation by Lessor shall be binding and conclusive between the parties
for the period in question. If Lessee gives a timely notice, the dispute shall
be resolved pursuant to Section 21 below. Each party shall pay one-half (1/2) of
the fee for making such determination except that if the adjustment in favor of
Lessee exceeds eight percent (8%) of the escalation amounts for the year in
question, Lessor shall pay (i) the entire cost of any such third-party
determination; and (ii) Lessee's out-of-pocket costs and reasonable expenses for
personnel time in responding to the audit. Nothing herein shall reduce Lessee's
obligations to make all payments as required by this Lease.
6.5 Limitation on Adjoining Property Expenses. Notwithstanding any of
the foregoing, Lessee's pro rata share of CAM expenses and Property Taxes for
the Adjoining Property shall not exceed One Thousand Dollars ($1,000.00) in any
calendar year.
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<PAGE> 7
7. REPAIR AND MAINTENANCE.
7.1 Obligation. Lessee shall at all times during the term of this Lease
keep and maintain, at its own cost and expense, in good order, condition and
repair the entire nonstructural portions of the Premises (including, without
limitation, all improvements, fixtures and equipment thereon) making all repairs
and replacements, interior and exterior, above or below ground and ordinary or
extraordinary. Lessor shall keep in good order, condition and repair the
foundations, exterior walls (excluding the interior of all walls and the
exterior and interior of all exterior doors, plate glass, display and other
windows), roof (excluding interior ceiling), all historical aspects of the
Building, including the vestibule doors to the Premises, and all exterior and
interior lines and pipes of the Building, except for any damage thereto caused
by any act, negligence or omission of Lessee or Lessee's employees, agents,
contractors or customers, and any structural alterations or improvements
required by any governmental agency by reason of Lessee's use or occupancy of
the Premises. Lessee shall pay to Lessor as part of CAM expenses the costs which
Lessor incurs in performing its foregoing repair and maintenance obligations
with respect to all portions of the Building that Lessor is obligated to repair
and maintain, Lessor's actual cost to administer such repairs and maintenance,
less any contributions toward such costs made by or on behalf of other Lessees
of the Building. Reimbursements by Lessee to Lessor for its share of such costs
shall be included in Lessee's CAM charges. It is an express condition precedent
to all obligations of Lessor to repair that Lessee shall have notified Lessor in
writing of the need for such repair. If Lessor shall fail to commence the making
of repairs, as it is obligated to do by the terms hereof, within thirty (30)
days after such notice and the failure to repair has materially interfered with
Lessee's use of the Premises, Lessee's sole right and remedy for such failure on
the part of Lessor shall be to cause such repairs to be made and to charge
Lessor the reasonable cost therefor. No deductions will be made from rent or
other payment due to the Lessor.
7.2 Scope. Except for repairs necessitated solely as a result of
Lessor's negligence or that of Lessor's agents, employees and contractors,
Lessee's obligation to keep and maintain the Premises in good order, condition
and repair, ordinary wear and tear excepted, shall include, without limiting the
generality of Lessee's obligation, maintaining, but not repairing or replacing,
all interior plumbing and sewage facilities and pipes in the Premises, floors
(including floor coverings), doors, locks and closing devices, window casements
and frames, glass and plate glass, grilles, all interior electrical lines and
equipment, and equipment and all other appliances, within or attached to the
Premises. In addition, Lessee shall, at its sole cost and expense, install or
construct any improvements, equipment or fixtures required by any governmental
authority or agency as a consequence of Lessee's particular use and occupancy of
the
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Premises. Lessee shall replace any damaged plate glass on the Premises within
ten (10) working days of the occurrence of such damage.
7.3 Assignment. Lessor shall assign to Lessee, and Lessee shall have the
benefit of, any guarantee or warranty to which Lessor is entitled under any
purchase, construction or installation contract relating to a component of the
Premises which Lessee is obligated to repair and maintain. Lessee shall have the
right to call upon the contractor to make such adjustments, replacements or
repairs which are required to be made by the contractor under such contract.
Lessor further warrants that all mechanical and electrical systems are in good
working order at the Lease Commencement Date and warrants the same against
latent defects. Lessee shall have the benefit in Lessee's own name or in the
name of Lessor of all warranties relating to materials and construction of
improvements and Lessor shall, if necessary, assign any such warranties and
guaranties to Lessee upon request. Nothing herein shall limit the right of
Lessee to proceed against the manufacturer or supplier of any product under any
warranties which may be applicable.
7.4 Maintenance Contracts. Lessor shall at all times during the term
hereof employ and pay a firm satisfactory to Lessor, engaged in the business of
maintaining air conditioning systems, to perform periodic inspections of the
heating or air-conditioning systems serving the Premises and to perform any
necessary work or maintenance or repair thereon. All charges and expenses
therefor shall be included in Lessee's CAM charges for the Building.
7.5 Surrender. Upon the expiration or termination of this Lease, Lessee
shall surrender the Premises to Lessor in good order, condition and state of
repair, ordinary wear and tear and casualty excepted. Except as provided in
Sections 6.1, 7.1 and 16.5 herein, Lessee hereby waives the right to make
repairs at Lessor's expense under the provisions of any laws permitting repairs
by a Lessee at the expense of a Lessor to the extent allowed by law. Lessor and
Lessee have, by this Lease, made specific provision for such repairs and have
expressly defined their respective obligations.
8. ALTERATIONS.
8.1 Alterations Prohibited. Lessee shall make no improvements or
alterations of any kind which materially and adversely affect the leased
Premises without first obtaining Lessor's written consent, which consent shall
not be unreasonably withheld, conditioned or delayed.
8.1.1 Notwithstanding the foregoing and subject to Lessor's
prior written consent and approval, which shall not be unreasonably
withheld, conditioned or delayed, Lessor will allow Lessee or Lessee'
contractor to install all cabling,
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wiring and conduit necessary or desirable for Lessee's intended use of
the Premises (the "Wiring Installation"). Lessor approves of EC
Electrical Construction Company or a substitute contractor of reasonably
equivalent qualifications as the contractor for the Wiring Installation.
The Wiring Installation shall be at Lessee's sole cost and expense,
shall comply with all applicable building codes and other governmental
regulations and shall be first-class material and workmanship. Any
contractor providing Wiring Installation shall provide a certificate of
insurance to Lessor, showing Lessor as an additional insured under all
commercially reasonable and necessary policies of insurance.
8.1.2 In performing the Wiring Installation, Lessee shall keep
the real property where the Wiring Installation is to be performed free
from any liens arising out of any work performed, materials furnished or
obligations incurred by Lessee. Lessee shall pay, when due, all sums of
money that may become due or purportedly due for any labor, services,
materials, supplies, or equipment alleged to have been furnished or to
be furnished to or for Lessee in performing the Wiring Installation and
which may be secured by any mechanic's, material-men's, or other lien,
and Lessee shall cause each such lien to be fully discharged and
released at the time performance of the obligation secured matures or
becomes due. Lessee shall defend, indemnify and hold Lessor harmless
from all loss, damage and expense, including reasonable attorneys' fees
which may arise from such lien.
8.2 Ownership of Alterations. All permanent improvements and alterations
performed on the leased Premises by either Lessor or Lessee shall be the
property of Lessor when this Lease terminates, except for Lessee's trade
fixtures.
8.3 Lessee Improvements. Lessor agrees to pay a portion of the cost of
Tenant Improvements to the Premises, such improvements to be substantially as
set forth in Exhibit "B." The parties agree that Lessor shall not pay more than
Seven Hundred Twenty Three Thousand and No/100 Dollars ($723,000.00) toward the
cost of such Tenant Improvements (the "Allowance") and that as of the date of
execution of this Lease, Lessor has paid Ninety Seven Thousand Five Hundred
Sixty and No/100 Dollars ($97,560.00) of the Allowance, as detailed on Exhibit
"C", attached hereto. Any costs and expenses in excess of the Allowance that may
be necessary to complete the Tenant Improvements by April 15, 1999 shall be at
Lessee's sole cost and expense. The parties agree that on the date of execution
of this Lease, Lessee has paid Lessor Twenty Five Thousand and No/100 Dollars
($25,000.00) which shall be applied by Lessor to pay for the cost and related
expenses of all Tenant Improvements to the Premises in excess of and after the
Allowance has been paid by Lessor.
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8.4 Signs. Subject to Lessor's prior written consent and approval, which
shall not be unreasonably withheld, conditioned or delayed, Lessor will allow
Lessee to install signs identifying Lessee's business, on the outside wall of
the building at the main entry to the building and next to the ground floor
elevator. Such installation shall be at Lessee's sole cost and expense.
9. UTILITIES.
Lessee shall pay all initial utility deposits, submetering costs and
fees, and all monthly service charges for water, electricity, sewer, gas,
telephone and any other utility services furnished to the Premises and the
improvements thereon during the entire term of this Lease. In the event any such
services are not submetered or separately metered or otherwise billed directly
to Lessee, but rather are billed to and paid by Lessor, Lessee shall pay to
Lessor the cost of such services provided to Lessee. Except to the extent of an
interruption of Lessee's utility services caused by Lessor or one of Lessor's
contractors, Lessor shall not be liable for any reason for any loss or damage
resulting from an interruption of any of the above services.
10. DAMAGE AND DESTRUCTION.
10.1 Unless Lessee elects to extend the term of this Lease as provided
herein, if during the last three years of the lease term or any extended term
the Building is substantially destroyed by fire, storm, lightning, earthquake or
other casualty, either party shall have the right to terminate this Lease on
thirty (30) days written notice to the other party, and this Lease shall
terminate as of the date of such destruction. If Lessor so notifies Lessee,
Lessee may elect to extend the term, in which event this Lease shall not be
terminated and Lessor shall restore the Premises as set forth in paragraph 10.2
below. In the event of such termination, Lessor shall account to Lessee for that
portion of the monthly installment of rent which is attributable to the days
remaining in the month after the date of termination due to total destruction of
the Building. In the event of such termination, all proceeds of insurance shall
be the sole and absolute property of Lessor. Notice of termination or of
Lessee's election to extend this Lease shall be given within thirty (30) days of
the date of destruction.
10.2 If during other than the last three years of the lease term, the
Building is substantially damaged or damaged, but not wholly destroyed, by fire,
storm, lightning, earthquake or other casualty, Lessor shall restore the
Building to substantially the same condition as existed before the damage
(ordinary wear and tear excepted) as speedily as reasonably practicable;
provided, however, that if the damage shall be so extensive that the same cannot
be reasonably repaired and restored within six (6) months from the date of
casualty, or if the estimated cost of restoration exceeds the insurance proceeds
received as a result of such damage, Lessor shall have the right, exercisable by
written
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notice to Lessee within sixty (60) days after the occurrence, to terminate this
Lease. In the event of such termination, Lessor shall account to Lessee for that
portion of the monthly installment of rent which is attributable to the days
remaining in the month after the date of termination due to such destruction and
all proceeds of insurance shall be the sole and absolute property of Lessor. If
Lessor has no such right to terminate, or if Lessor has the right but fails to
exercise the same within the aforesaid sixty (60) day period, then Lessor shall
proceed as stated above to restore the Building.
11. EMINENT DOMAIN.
11.1 Partial Taking. If a portion of the Premises is condemned and
paragraph 11.1 does not apply, the lease shall continue on the following terms:
A. Lessor shall be entitled to all of the proceeds of condemnation, and
Lessee shall have no claim against Lessor as a result of the condemnation.
Nothing in this paragraph 11 shall be construed to affect Lessee's entitlement
to any condemnation award applicable to Lessee's trade fixtures, removal of
personal property and moving expenses or Lessee's right to assert its own
condemnation claim.
B. Lessor shall proceed as soon as reasonably possible to make such
repairs and alterations to the Premises as are necessary to restore the
remaining Premises to a condition as comparable as reasonably practicable to
that existing at the time of the condemnation.
C. After the date on which title vests in the condemning authority or an
earlier date on which alterations or repairs are commenced by Lessor to restore
the balance of the property in anticipation of taking, the rent shall be reduced
in proportion to the reduction in value of the Premises as an economic unit on
account of the partial taking.
11.2 Total Taking. If a condemning authority takes all of the Premises
or a portion sufficient to render the remaining Premises reasonably unsuitable
for the use which Lessee was then making of the Premises, the lease shall
terminate as of the date the title vests in the condemning authorities. Such
termination shall have the same effect as a termination under paragraph 11.1(a)
above. Lessor shall be entitled to all of the proceeds of condemnation, and
Lessee shall have no claim against Lessor as a result of the condemnation.
11.3 Sale in Lieu of Condemnation. Sale of all or part of the Premises
to a purchaser with the power of eminent domain in the face of a threat or
probability of the exercise of the power shall be treated for the purpose of
this Section 11 as a taking by condemnation.
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12. LIABILITY AND INDEMNITY.
12.1 Liens
A. Except with respect to activities for which Lessor or Fila is
responsible, Lessee shall pay as due all claims for work done on and for
services rendered or material furnished to the Premises and shall keep the
Premises free from any liens. If Lessee fails to pay any such claims or to
discharge any lien, Lessor may do so and collect the cost as additional rent.
Any amount so added shall bear interest at the rate of ten percent (10%) per
annum from the date expended by Lessor and shall be payable on demand. Such
action by Lessor shall not constitute a waiver of any right or remedy which
Lessor may have on account of Lessee's default.
B. Lessee may withhold payment of any claim in connection with a
good-faith dispute over the obligation to pay, so long as Lessor's property
interests are not jeopardized. If a lien is filed as a result of nonpayment,
Lessee shall, within ten (10) days after knowledge of the filing, secure the
discharge of the lien or deposit with Lessor cash or sufficient corporate surety
bond or other surety satisfactory to Lessor in an amount sufficient to discharge
the lien plus any costs, attorney fees, and other charges that could accrue as a
result of a foreclosure or sale under the lien.
12.3 Indemnification. Except as otherwise provided herein and except for
Lessor's acts of negligent, intentional or willful misconduct, Lessor shall not
be liable to Lessee, and Lessee hereby waives all claims against Lessor, for any
injury to or death of any person or damage to or destruction of property in or
about the Premises by or from any cause whatsoever, including, without
limitation, gas, fire, oil, electricity or leakage of any character from the
roof, walls, basement or other portion of the Premises of such building. Lessor
shall not be liable to Lessee for the acts of any third party. Except for
damages caused by Lessor's negligent, intentional or willful misconduct, Lessee
shall indemnify, defend and hold harmless Lessor, its principals, successors,
agents and assigns from any and all claims arising from Lessee's use of the
Premises or from the conduct of its business or from any activity, work, or
other things done, permitted, or suffered by Lessee in or about the Premises,
and shall further indemnify, defend and hold harmless Lessor against and from
any and all claims arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any act or negligence of Lessee or any
officer, agent, employee, guest, or invitee of Lessee and from all
costs, expenses, attorneys' fees, and liabilities incurred in or about the
defense of any such claim or any action or proceeding brought thereon, and in
case any action or proceeding brought against Lessor by reason of such claim,
Lessee, upon notice from Lessor, shall defend
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the same at Lessee's expense by counsel reasonably satisfactory to Lessor. The
provisions of this paragraph 12.3 shall survive the termination of the Lease.
12.4 Liability Insurance. Before going into possession of the Premises,
Lessee shall procure and thereafter during the term of the lease shall continue
to carry the following insurance at Lessee's cost: public liability and property
damage insurance carried by a responsible company with limits of (i) not less
than Five Million Dollars ($5,000,000.00) for injury to one (1) person and (ii)
Two Million Dollars ($2,000,000.00) for damage to property or such higher limits
as may be required by applicable regulatory agencies. Such insurance shall cover
all normally insured risks arising directly or indirectly out of Lessee's
activities on or any condition of the Premises whether or not related to an
occurrence caused or contributed to by Lessor's negligence, shall protect Lessee
against the claims of Lessor on account of the obligations assumed by Lessee
under paragraph 11.2, and shall protect Lessor and Lessee against claims of
third persons. Certificates evidencing such insurance and bearing endorsements
requiring ten (10) days' written notice to Lessor prior to any change or
cancellation shall be furnished to Lessor prior to Lessee's occupancy of the
property.
13. QUIET ENJOYMENT.
13.1 Lessor's Warranty. Lessor warrants that it is the owner of the
Premises and has the right to lease them free of all encumbrances. Lessor will
defend Lessee's right to quiet enjoyment of the Premises from the lawful or
unlawful claims of all persons during the lease term.
13.2 Estoppel Certificate. Either party will within twenty (20) days
after notice from the other execute and deliver to the other party a certificate
stating whether or not this lease has been modified and is in full force and
effect and specifying any modifications or alleged breaches by the other party.
The certificate shall also state the amount of monthly base rent, the dates to
which rent has been paid in advance, and the amount of any security deposit or
prepaid rent. Failure to deliver the certificate within the specified time shall
be conclusive upon the party of whom the certificate was requested that the
lease is in full force and effect and has not been modified except as may be
represented by the party requesting the certificate.
13.3 Nondisturbance Agreement. Lessor shall obtain a standard
nondisturbance agreement from its Lender in a form that is reasonably
satisfactory to Lessee. This Lease shall not be binding on Lessee unless and
until the nondisturbance agreement is obtained.
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14. ASSIGNMENT AND SUBLEASE.
No part of the leased property may be assigned, mortgaged, or subleased
by Lessee, nor may a right of use of any portion of the Premises be conferred on
any third person by any other means, without the prior written consent of
Lessor, which consent shall not be unreasonably withheld, conditioned or
delayed. This provision shall apply to all transfers by operation of law. No
consent in one instance shall prevent the provision from applying to a
subsequent instance. In determining whether to consent to assignment, Lessor may
consider the financial ability of assignee and the business experience of
assignee. Transfers to a parent or wholly owned subsidiary corporation, which
shall be bound by this Lease, shall not constitute a transfer for purposes of
this section. Lessor understands that Lessee intends to sublet a portion of the
Premises for retail use. Lessor agrees to reasonably approve such retail uses.
15. DEFAULT.
The following shall be events of default:
15.1 Default in Rent. Failure of Lessee (a) to pay any rent within ten
(10) days after it is due and after Lessor shall have first given Lessee ten
(10) days' written notice of nonpayment, provided that such written notice shall
not be given more than once in any calendar year or (b) failure to pay any
charge other than rent which is Lessee's responsibility within thirty (30) days
after written notice of said charge has been given by Lessor to Lessee.
15.2 Default in Other Covenants. Failure of Lessee to comply with any
term or condition or fulfill any obligation of the lease (other than the payment
of rent or other charges) within thirty (30) days after written notice by Lessor
specifying the nature of the default with reasonable particularity. If the
default is of such a nature that it cannot be completely remedied within the
30-day period, this provision shall be complied with if Lessee begins correction
of the default within the thirty (30) day period and thereafter proceeds with
reasonable diligence and in good faith to effect the remedy as soon as
practicable.
15.3 Insolvency. Insolvency of Lessee; an assignment by Lessee for the
benefit of creditors; the filing by Lessee of a voluntary petition in
bankruptcy; an adjudication that Lessee is bankrupt or the appointment of a
receiver of the properties of Lessee; the filing of any involuntary petition of
bankruptcy and failure of the Lessee to secure a dismissal of the petition
within forty-five (45) days after filing; attachment of or the levying of
execution on the leasehold interest and failure of Lessee to secure discharge of
the attachment or release of the levy of execution within forty-five (45) days.
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15.4 Default by Lessor. Failure by Lessor to comply with any term or
condition or fulfill any obligation of the lease which relate to Lessor within
thirty (30) days after written notice by Lessee specifying the nature of the
default with reasonable particularity. If the default is of such a nature that
it cannot be completely remedied within the thirty (30) day period, this
provision shall be compiled with if Lessor begins correction of the default
within the thirty (30) day period and thereafter proceeds with reasonable
diligence and in good faith to effect the remedy as soon as practicable.
16. REMEDIES ON DEFAULT.
16.1 Termination. In the event of a default the Lease may be terminated
at the option of Lessor by notice in writing to Lessee. If the lease is not
terminated by election of Lessor or otherwise, Lessor shall be entitled to
recover damages from Lessee for the default if the lease is terminated, Lessee's
liability to Lessor for damages shall survive such termination, and Lessor may
re-enter, take possession of the Premises, and remove any persons or property by
legal action or by self-help with the use of reasonable force and without
liability for damages.
16.2 Reletting. Following re-entry or abandonment, Lessor may relet the
Premises, but Lessor shall not be required to relet for any use or purpose which
Lessor may reasonably consider injurious to the Premises or to any Lessee which
Lessor may reasonably consider objectionable. Lessor may relet all or part of
the Premises, alone or in conjunction with other properties for a term longer or
shorter than the term of this Lease, upon any reasonable terms and conditions,
including the granting of some rent-free occupancy or other rent concession.
16.3 Right to Sue More Than Once. Lessor may sue periodically to recover
damages during the period corresponding to the remainder of the lease term, and
no action for damages shall bar a later action for damages subsequently
accruing.
16.4 Remedies Cumulative. The foregoing remedies shall be in addition to
and shall not exclude any other remedy available to Lessor under applicable law.
16.5 Default by Lessor. In the event of a default by Lessor herein which
has not been cured as provided therein, Lessee may cure said default and may
offset the costs of said cure against the rent payments payable herein by
Lessee. This shall be in addition to all other remedies available to Lessee.
17. SURRENDER AT EXPIRATION.
17.1 Condition of Premises. Upon expiration of the lease term or earlier
termination on account of default, Lessee shall deliver all keys to Lessor and
surrender
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the Premises in the same condition as when said property was delivered to
Lessee, reasonable wear and tear and damage due to fire and unavoidable casualty
excepted. Alterations constructed by Lessee with permission from Lessor shall
not be removed or restored to the original condition unless the terms of
permission for the alteration so require. Depreciation and wear from ordinary
use for which the Premises were leased are excepted. Restoration for which
Lessee is responsible shall be completed to the latest practical date prior to
such surrender. Lessee's obligations under this paragraph shall be subordinate
to the provisions of Section 10 herein related to destruction.
17.2 Fixtures.
A. All fixtures placed upon the Premises during the term, other than
Lessee's trade fixtures, shall, at Lessor's option, become the property of
Lessor when this Lease terminates or expires.
B. Prior to or within fifteen (15) days after expiration or termination
of the lease term, Lessee shall remove all furnishings, furniture, and trade
fixtures which remain its property. If Lessee fails to do so, this shall be an
abandonment of the property, and Lessor may retain the property and all rights
of the Lessee with respect to it shall cease.
17.3 Holdover.
A. If Lessee does not vacate the Premises at the time required, Lessor
shall have the option to treat Lessee as a Lessee from month to month, subject
to all of the provisions of this Lease except the provisions for term and
renewal and at a rate equal to 125% of the rent last paid by Lessee during the
original term. Failure of Lessee to remove fixtures, furniture, furnishings, or
trade fixtures which Lessee is required to remove under this lease shall
constitute a failure to vacate to which this paragraph shall apply if the
property not removed will substantially interfere with occupancy of the Premises
by another Lessee or with occupancy by Lessor for any purpose including
preparation for a new Lessee.
B. If a month-to-month tenancy results from a holdover by Lessee under
this paragraph 17.3, the tenancy shall be terminable at the end of any monthly
rental period on written notice from Lessor given not less than ten (10) days
prior to the termination date which shall be specified in the notice. Lessee
waives any notice which would otherwise be provided by law with respect to a
month-to-month tenancy.
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18. MISCELLANEOUS.
18.1 Nonwaiver. Waiver by either party of strict performance of any
provision of this lease shall not be a waiver of or prejudice the party's right
to require strict performance of the same provision in the future or of any
other provision.
18.2 Attorney Fees. If suit or action is instituted in connection with
any controversy arising out of this lease, the prevailing party shall be
entitled to recover in addition to costs such sum as the court may adjudge
reasonable as attorney fees.
18.3 Succession. Subject to the above-stated limitations on transfer of
Lessee's interest, this lease shall be binding upon and inure to the benefit of
the parties, their respective successors and assigns.
18.4 Lessor's Right to Cure Defaults. If Lessee fails to perform any
obligation under this lease, Lessor shall have the option to do so after thirty
(30) days' written notice to Lessee. All of Lessor's reasonable and necessary
expenditures to correct the default shall be reimbursed by Lessee on demand with
interest at the rate of ten percent (10%) per annum from the date of expenditure
by Lessor.
18.5 Recordation. This lease shall not be recorded without the consent
in writing of Lessor. Lessor shall execute and acknowledge a memorandum of this
lease in a form suitable for recording, and Lessee may record the memorandum.
18.6 Entry for Inspection. Except for emergencies, Lessor shall have the
right to enter upon the Premises at any time upon 24 hours' notice to determine
Lessee's compliance with this lease, or to show the Premises to any prospective
Lessee or purchaser, and in addition shall have the right, at any time during
the last two months of the term of this lease, to place and maintain upon the
Premises notices for leasing or selling of the Premises.
18.7 Interest on Rent and Other Charges. Any rent or other payment
required of Lessee by this lease shall, if not paid within ten (10) days after
it is due, bear interest at ten percent (10%) from the due date until paid.
18.8 Proration of Rent. In the event of commencement or termination of
this Lease at a time other than the beginning or end of one of the specified
rental periods, then the rent shall be prorated as of the date of commencement
or termination and in the event of termination for reasons other than default,
all prepaid rent shall be refunded to Lessee or paid on its account.
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18.9 Utilities. Lessee shall pay all charges for heat, light, power,
water, sewage and other services used by Lessee on the Premises. However, all
such charges shall be prorated between the parties to the first and last days of
the lease.
18.10 Notice. Any notice required or permitted under this lease, shall
be effective when actually delivered or, if mailed five (5) days after the
notice is deposited as registered, express or certified mail, directed to the
address set forth below or to such other address as either party may specify
from time to time by notice to the other party. Subject to the foregoing, the
respective addresses of the parties for sending notices are as follows:
If to Lessor: Bridgetown Development Company, II, L.L.C.
7330 NE 14th
Vancouver, Washington 98664
ATTN: Timothy L. Small
With a copy to: Sean Donahue
1620 Benj. Franklin Plaza
One SW Columbia Street
Portland, Oregon 97258-2098
If to Lessee: 800.COM, Inc.
1631 N.W. Thurman Street
Portland, Oregon 97209
ATTN: Spencer Brown
With a copy to: Christopher T. Matthews
Perkins Coie LLP
1211 SW Fifth Avenue, Suite 1500
Portland, Oregon 97204-3715
18.11 Environmental Matters.
A. Lessee shall obtain, at its sole cost and expense, all environmental
and regulatory permits that are required for Lessee's operations on the Premises
as of the Lease Commencement Date, including, but not limited to air, water and
solid and hazardous waste disposal permits. Lessee shall be solely liable for
compliance therewith and shall indemnify and hold Lessor harmless from and
against any and all claims or losses arising therefrom. Lessee shall obtain all
permits subsequently required during the term of this lease.
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B. Lessee agrees to and expressly assumes full responsibility and
liability for compliance with applicable laws concerning Lessee's use of the
Premises and regulations relating to and governing environmental matters
including but not limited to the requirements of the Resource Conservation and
Recovery Act, as amended, and the regulations promulgated thereunder.
C. In the event Lessee believes any reportable spill, leak, emission,
discharge, escape, leach or disposal (collectively "release") of regulated
substances or product which becomes a hazardous waste upon release, has occurred
on the Premises or Adjoining Property, then Lessee shall immediately notify
Lessor and any appropriate governmental agency of the release.
D. In the event Lessee receives notification from any agency or
department of government (1) asserting the Lessee is not in compliance with any
statutes, ordinances, regulations, licensing requirements, or orders threatening
to revoke any license, franchise, permit or governmental authorization, or (ii)
announcing the promulgation of a new requirement relating to the Lessee's
operations, which could or might adversely affect the Lessee's operations, then
Lessee shall immediately give the Lessor notice thereof.
E. Lessee agrees to indemnify and hold Lessor harmless from any and all
environmental liability caused by Lessee's operations including but not limited
to liability imposed on Lessor as a potentially responsible party under the
Resource Conservation and Recovery Act, as amended, and regulations promulgated
thereunder with respect to the Premises.
18.12 Lessor and Lessee are parties to a Lease Agreement dated November
23, 1998 (the "November Lease Agreement"). Upon execution of this Lease, Lessor
shall release Lessee from all of its obligations under the November Lease
Agreement, including any and all fees for architectural services incurred in
connection with the November Lease Agreement. The parties agree that upon
execution of this Lease, the November Lease Agreement shall be null and void and
of no further force and effect.
19. NET LEASE.
It is the purpose and intent of Lessor and Lessee that this is intended
to be a net lease, meaning that Lessee shall pay or reimburse Lessor for all
expenses of any type relating to the Premises after the Lease Commencement Date
and all rent shall be paid without setoff, offset, abatement or deduction of any
kind, unless otherwise expressly stated in this Lease.
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20. LEASE CONSIDERATION AND PREPAID RENT.
Upon execution of this Lease, Lessee shall deposit with Lessor the sum
of Thirty Nine Thousand Eight Hundred Seventy Five and No/100 Dollars
($39,875.00) (the "deposit"), less the Eighteen Thousand Nine Hundred Thirty
Three and 33/100 Dollars ($18,933.33) that Lessee has previously paid Lessor.
The deposit shall be held by Lessor as security for the faithful performance by
Lessee of all the provisions of this Lease to be performed or observed by
Lessee. If Lessee fails to pay rent or other charges due hereunder, or otherwise
defaults with respect to any provision of this Lease, Lessor may use, apply or
retain all or any portion of the deposit for the payment of any rent or other
charge in default or for the payment of any other sum to which Lessor may be
obligated by reason of Lessee's default, or to compensate Lessor for any loss or
damage which Lessor may suffer thereby. If Lessor so uses or applies all or any
portion of the deposit, Lessee shall within ten (10) days after demand therefor
deposit cash with Lessor in an amount sufficient to restore the deposit to the
full amount thereof. Lessee's failure to do so shall be a material breach of
this Lease. Lessor shall not be required to keep the deposit separate from its
general accounts. If Lessee performs all of Lessee's obligations hereunder, the
deposit, or so much thereof as has not therefore been applied by Lessor, shall
be returned, without payment of interest or other increment for its use to
Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's
interest hereunder) at the expiration of the term hereof, and after Lessee has
vacated the Premises. No trust relationship is created herein between Lessor and
Lessee with respect to the deposit.
21. ARBITRATION.
Any and all disputes arising out of or in connection with this contract,
including any question regarding its existence, validity, interpretation,
performance or termination, shall be referred to and finally resolved by
arbitration or mediation under the Commercial Arbitration Rules of the American
Arbitration Association, which rules are deemed to be incorporated herein by
reference. The law governing this contract shall be the substantive law of the
State of Oregon. The place of arbitration shall be Portland, Oregon.
22. COUNTERPARTS.
This lease may be executed in one or more counterparts, all of which
shall be considered one and the same document, and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other parties.
-20-
<PAGE> 21
DATED as of the date and year first above written.
LESSOR: LESSEE:
Bridgetown Development Company, II, 800.COM, Inc., an Oregon corporation
LLC doing business as 800.COM
an Oregon limited liability company
By: /s/ By: /s/ Gregory L. Drew
---------------------------------- ---------------------------------
Signature Signature
President, CEO
- ------------------------------------- ------------------------------------
Name and Title Name and Title
-21-
<PAGE> 1
EXHIBIT 10.6
CB RICHARD ELLIS
SUBLEASE
CB Richard Ellis, Inc.
Brokerage and Management
Licensed Real Estate Broker
1. PARTIES.
This Sublease, dated August 31, 1999, is made between A & M Warehouses,
Inc. (Sublessor), and 800.COM, Inc. (Suble
2. MASTER LEASE.
Sublessor is the lessee under a written lease dated November 24, 1998,
wherein INVESCO Realty Advisors leased to Sublessor the real property
located in the City of Portland, County of Multnomah State of Oregon,
described as an approximate 523,000 square foot warehouse building
located at # No. Ramsey Boulevard ("Master Lease"). Said lease has been
amended by the following amendments said leases and amendments are
herein collectively referred to as the "Master Lease" and are attached
hereto as Exhibit "A".
3. PREMISES.
Sublessor hereby subleases to Sublessee on the terms and conditions set
forth in this Sublease the following portion of the Master Premises
("Premises"): Approximately 210,000 square feet located in the northwest
corner of the premises as depicted on Exhibit A-1 and A-2 ("Master
Premises").
4. WARRANTY BY SUBLESSOR.
Sublessor warrants and represents to Sublessee that the Master Lease has
not been amended or modified except as expressly set forth herein, that
Sublessor is not now, and as of the commencement of the Term hereof will
not be, in default or breach of any of the provisions of the Master
Lease, and that Sublessor has no knowledge of any claim by Lessor that
Sublessor is in default or breach of any of the provisions of the Master
Lease.
5. TERM.
The Term of this Sublease shall commence on September 27, 1999,
("Commencement Date"), or when Lessor consents to this Sublease (if such
consent is required under the Master Lease), whichever shall last occur,
and end on March 31, 2001 ("Termination Date"), unless otherwise sooner
terminated in accordance with the provisions of this Sublease. In the
event the Term commences on a date other than the Commencement Date,
Sublessor and Sublessee shall execute a memorandum setting forth the
actual date of commencement of the Term. Possession of the Premises
("Possession") shall be delivered to Sublessee on the commencement of
the Term. If for any reason Sublessor does not deliver Possession to
Sublessee on the commencement of the Term, Sublessor shall not be
subject to any liability for such failure, the Termination Date shall
not be extended by the delay, and the validity of this Sublease shall
not be impaired, but rent shall abate until delivery of Possession.
Notwithstanding the foregoing, if Sublessor has not delivered Possession
to Sublessee within thirty (30) days after the Commencement Date, then
at any time thereafter and before delivery of Possession, Sublessee may
give written notice to Sublessor of Sublessee intention to cancel this
Sublease. Said notice shall set forth an effective date for such
cancellation which shall be at least ten (10) days after delivery of
said notice to Sublessor. If Sublessor delivers Possession to Sublessee
on or before such effective date, this Sublease shall remain in full
force and effect. If Sublessor fails to deliver Possession to Sublessee
on or before such effective date, this Sublease shall be canceled, in
which case all consideration previously paid by Sublessee to Sublessor
on account of this Sublease shall be returned to Sublessee, this
Sublease shall thereafter be of no further force or effect, and
Sublessor shall have no further
PAGE 1
<PAGE> 2
liability to Sublessee on account of such delay or cancellation. If
Sublessor permits Sublessee to take Possession prior to the commencement
of the Term, such early Possession shall not advance the Termination
Date and shall be subject to the provisions of this Sublease, including
without limitation the payment of rent.
6. RENT.
6.1 Minimum Rent. Sublessee shall pay to Sublessor as minimum rent,
without deduction, set off, notice, or demand, at 5002 D Street NW
Auburn, WA 98001 or at such other place as Sublessor shall designate
from time to time by notice to Sublessee. If the Term begins or ends on
a day other than the first or last day of a month, the rent for the
partial months shall be pro rated on a per diem basis. Additional
provisions:
SEE RENT SCHEDULE PER ADDENDUM A.
6.2 Operating Costs. If the Master Lease requires Sublessor to pay to
Lessor all or a portion of the expenses of operating the building and/or
project of which the Premises are a part ("Operating Costs"), including
but not limited to taxes, utilities, or insurance, then Sublessee shall
pay to Sublessor as additional rent forty and two tenths percent (40.2%)
of the amounts payable by Sublessor for Operating Costs incurred during
the Term. Such provides for the payment by Sublessor of Operating Costs
on the basis of an estimate thereof, then as and when adjustments
between estimated and actual Operating Costs are made under the Master
Lease, the obligations of Sublessor and Sublessee hereunder shall be
adjusted in a like manner; and if any such adjustment shall occur after
the expiration or earlier termination of the Term, then the obligations
of Sublessor and Sublessee under this Subsection 6.2 shall survive such
expiration or termination. Sublessor shall, upon request by Sublessee,
furnish Sublessee with copies of all statements submitted by Lessor of
actual or estimated Operating Costs during the Term.
Sublessee shall be obligated to pay only its prorata share of those
costs paid by the Sublessor to Lessor as "Expenses" under the master
Lease, and in no event shall Sublessee be obligated to pay to Sublessor
any additional costs, fees or other charges that are not paid by
Sublessor to Master Lessor as "Expenses" under the Master Lease. Within
twenty (20) days of Sublessor's receipt of any statement, including
without limitation the annual accounting statement, received from the
Lessor with respect to Operating Costs, (which costs the Master Lease
Defines as "Expenses"), Sublessor will deliver such statement to
Sublessee. Sublessee shall have the same rights as granted to Sublessor
in the Master Lease to dispute any item or amount included in Operating
Costs, which shall be given by written notice to Sublessor within twenty
(20) days of receipt of the annual accounting statement for such costs.
Notwithstanding any provision to the contrary contained in the Sublease
or in the Master Lease, and regardless of the definition of "Expenses"
in the Master Lease, as between Sublessee and Sublessor under this
Sublease, Sublessee shall not be obligated to pay its own prorata share
of, and Operating Costs hereunder shall not include costs with respect
to any of the following items: (1) repairs, restoration or other work
occasioned by fire, wind or other casualty; (2) income and franchise
taxes of Lessor or Sublessor; (3) expenses incurred in leasing to or
procuring of tenants, leasing commissions, advertising and marketing
expenses and expenses for the renovating of space leased to tenants; (4)
interest or principal payments on any mortgage or other indebtedness or
rent under any ground lease; (5) costs to construct the budding or costs
incurred in order to repair defects in such construction; (6) expenses
incurred in disputes with other tenants or due to Landlord's violation
of any other lease in the building; (7) any penalties, interest or other
charges due to late payment of any sums or due to negligence or wrongful
conduct; (8) any capital cost or expense to the extent that it is paid
or reimbursed from any person (other than as payment for Expenses),
including costs reimbursed by warranty, insurance, service contracts,
condemnation proceeds or otherwise; (10) any cost representing an amount
paid to a person, firm, corporation or other entity related to Lessor
that is in excess of the amount that would have been paid on a arms
length basis in the absence of such relationship; (11) the
PAGE 2
<PAGE> 3
cost of curing any violation of any law, ordinance or regulation or of
remediating any environmental condition (unless caused by Sublessee); or
(12) costs incurred in connection with the sale, financing, refinancing,
selling or change of ownership of the building or any part thereof.
7. SECURITY DEPOSIT.
Sublessee shall deposit with Sublessor upon execution of this Sublease
the sum of Eighty-Seven Thousand Seven Hundred Fifty-Eight and No/100
Dollars ($87,758.00) as security for Sublessee's faithful performance of
Sublessee's obligations hereunder ("Security Deposit"). If Sublessee
fails to pay rent or other charges when due under this Sublease, or
fails to perform any of its other obligations hereunder, Sublessor may
use or apply all or any portion of the Security Deposit for the payment
of any rent or other amount then due hereunder and unpaid, for the
payment of any other sum for which Sublessor may become obligated by
reason for Sublessee default or breach, or for any loss or damage
sustained by Sublessor as a result of Sublessee's default or breach. If
Sublessor so uses any portion of the Security Deposit, Sublessee shall,
within ten (10) days after written demand by Sublessor, restore the
Security Deposit to the full amount originally deposited, and Sublease's
failure to do so shall constitute a default under this Sublease.
Sublessor shall not be required to keep the Security Deposit separate
from its general accounts, and shall have no obligation or liability for
payment of interest on the Security Deposit. In the event Sublessor
assigns its interest in this Sublease, Sublessor shall deliver to its
assignee so much of the Security Deposit as is then held by Sublessor.
Within ten (10) days after the Term has expired, or Sublessee has
vacated the Premises, or any final adjustment pursuant to Subsection 6.2
hereof has been made, whichever shall last occur, and provided Sublessee
is not then in default of any of its obligations hereunder, the Security
Deposit, or so much thereof as had not theretofore been applied by
Sublessor, shall be returned to Sublessee or to the last assignee, if
any, of Sublessee's interest hereunder.
8. USE OF PREMISES.
The Premises shall be used and occupied only for general office use and
storage of and processing orders for electronics and other consumer
products per applicable Rivergate district zoning, and for no other use
or purpose.
9. ASSIGNMENT AND SUBLETTING.
Sublessee shall not assign this Sublease or further sublet all or any
part of the Premises without the prior written consent of Sublessor (and
the consent of Lessor, if such is required under the terms of the Master
Lease), which shall not be unreasonably withheld and shall be processed
in accordance with the process in the Master Lease.
10. OTHER PROVISIONS OF SUBLEASE.
All applicable terms and conditions of the Master Lease are incorporated
into and made a part of this Sublease as if Sublessor were the lessor
thereunder, Sublessee thereunder, and the Premises the Master Premises.
With respect to the relationship between the Sublessor and the
Sublessee, this Sublease will govern any conflict that may arise between
the Sublease and the Master Lease. Sublessee assumes and agrees to
perform the lessee obligations under the Master lease during the Term to
the extent that such obligations are applicable to the Premises, except
that the obligation to pay rent to Lessor under the Master lease shall
be considered performed by Sublessee to the extent and in the amount
rent is paid to Sublessor in accordance with Section 6 and Addendum A of
this Sublease. Sublessee shall not commit or suffer any act or omission
that will violate any of the provisions of the Master Lease. Sublessor
shall exercise due diligence in attempting to cause Lessor to perform
its obligations under the Master Lease for the benefit of Sublessee and
shall use diligent efforts to obtain consents of Lessor required under
the Master Lease. If the Master Lease terminates, this Sublease shall
terminate and the parties shall be relieved of any further liability or
obligation under this Sublease, provided however, that if the Master
Lease terminates as a result of a default or breach by Sublessor or
Sublessee under this Sublease and/or the Master Lease, then the
defaulting party shall be liable to the non-defaulting party
PAGE 3
<PAGE> 4
for the damage suffered as a result of such termination. Notwithstanding
the foregoing, if the Master Lease gives Sublessor any right to
terminate the Master Lease in the event of the partial or total damage,
destruction, or condemnation of the Master Premises or the building or
project of which the Master Premises are a part, the exercise of such
right by Sublessor shall not constitute a default or breach hereunder.
Sublessor represents and warrants that the copy of the Master Lease
provided to Sublessee is a true, complete and accurate copy of the
Master Lease, and that Sublessor has the right, title, and authority to
enter into this Sublease and to sublease the Premises to Sublessee,
subject to obtaining the consent to Lessor. Sublessor agrees to keep the
Master Lease I full force and effect throughout the full term of this
Sublease, to perform all of its covenants and obligations thereunder (
(including without limitation the prompt and timely payment of all
amounts payable to it pursuant to the terms of the Master Lease) to
permit or suffer no amendment or modification thereto without the
consent of the Sublessee and to do not act and to make no omission which
might create a default or might occasion or permit the termination
thereof. Sublessor shall not assign its interest under the Master Lease
without written notice of such assignment to Sublessee. Sublessor shall
deliver copies of all notices, including without limitation notices of
default, given to or received from Lessor under the Master Lease, and
Sublessee shall have the right, but not the obligation, to cure any
default by Sublessor under the Master Lease, and to deduct from Rent any
amounts reasonably paid in doing so.
11. ATTORNEYS FEES.
If Sublessor, Sublessee, or Broker shall commence an action against the
other arising out of or in connection with this Sublease, the prevailing
party shall be entitled to recover its costs of suit and reasonable
attorneys fees.
12. AGENCY DISCLOSURE.
Sublessor and Sublessee each warrant that they have dealt with no other
real estate broker in connection with this transaction except CB RICHARD
ELLIS, INC., who represents Sublessor and Norris, Beggs & Simpson, who
represents Sublessee. In the event that CB RICHARD ELLIS, INC.
represents both Sublessor and Sublessee, Sublessor and Sublessee hereby
confirm that they were timely advised of the dual representation and
that they consent to the same, and that they do not expect said broker
to disclose to either of them the confidential information of the other
party.
13. COMMISSION.
Upon execution of this Sublease, and consent thereto by Lessor (if such
consent is required under the terms of the Master Lease), Sublessor
shall pay Broker a real estate brokerage commission in accordance with
Sublessor's contract with Broker for the subleasing of the Premises, if
any and otherwise in the amount of Eighty-Six Thousand Six Hundred
Fifty-Two and No/100 Dollars ($86,652.00), for services rendered in
effecting this Sublease. SUBLESSOR IS REPRESENTED BY CB RICHARD ELLIS
AND SUBLESSEE IS REPRESENTED BY NORRIS, BEGGS & SIMPSON. Broker is
hereby made a third party beneficiary of this Sublease for the purpose
of enforcing its right to said commission. PROVIDED SUBLESSOR AND
SUBLESSEE EXTEND AND/OR EXPAND THE SUBLEASE AGREEMENT, SUBLESSOR SHALL
PAY A LEASING COMMISSION EQUAL TO 5% OF THE AGGREGATE NET CONSIDERATION.
14. NOTICES.
All notices and demands which may or are to be required or permitted to
be given by either party to the other hereunder shall be in writing. All
notices and demands by the Sublessor to Sublessee shall be sent by
United States Mail, postage prepaid, or reputable overnight carrier,
addressed to the Sublessee at the Premises, and to the address
hereinbelow, or to such other place as Sublessee may from time to time
designate in a notice to the Sublessor. All notices and demands by the
Sublessee to Sublessor shall be sent by United States Mail, postage
prepaid, addressed to the Sublessor at the address set forth herein, and
to such other person or place as the Sublessor may from time to time
designate in a notice
PAGE 4
<PAGE> 5
to the Sublessee.
To Sublessor: 5002 D Street NW, Auburn, WA 98001
To Sublessee: 1516 NW Thurman, Portland, OR 97209
15. CONSENT BY LESSOR.
THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO BY
LESSOR WITHIN 10 DAYS AFTER EXECUTION HEREOF, IF SUCH CONSENT IS
REQUIRED UNDER THE TERMS OF THE MASTER LEASE.
16. COMPLIANCE.
The parties hereto agree to comply with all applicable federal, state
and local law, regulations, codes, ordinances and administrative orders
having jurisdiction over the parties, property or the subject matter of
this Agreement, including, but not limited to, the 1964 Civil Rights Act
and all amendments thereto, the Foreign Investment In Real Property Tax
Act, the Comprehensive Environmental Response Compensation and Liability
Act, and the Americans With Disabilities Act.
Sublessor: A & M Warehouses, Inc. Sublessee: 800.COM, Inc.
By: /s/ Nick Harbert By: /s/ Ken C. La Honta
-------------------------------- --------------------------------
Nick Harbert
Title: President Title: VP Finance, CFO
----------------------------- -----------------------------
By: By:
-------------------------------- --------------------------------
Date: 9/8/99 Date: 9/10/99
------------------------------ ------------------------------
PAGE 5
<PAGE> 6
ADDENDUM TO REAL ESTATE SUBLEASE
DATED SEPTEMBER 8, 1999
BETWEEN 800.COM, INC., AS SUBLESSEE,
AND A & M WAREHOUSES, INC., AS SUBLESSOR
PREMISES The Premises shall consist of approximately 210,000 square
DESCRIPTION: feet, located in the northwest corner of the building as
depicted in Exhibit A-1. The Premises also contains
approximately 3,500 square feet of office area in the corner
of the premises (Exhibit A-2).
SUBLESSOR'S Sublessor shall, at Sublessor's sole expense, provide the
IMPROVEMENTS: following "turn key" improvements to the Premises; which
shall be completed in a good workmanlike manner in
compliance with all laws, on or before the commencement
date.
o construct a standard 12' high cyclone fence demising wall
around the perimeter of the premises as depicted on
Exhibit A-1.
o construct a "secured area" fence per applicable municipal
code in an approximate 12,000 square foot area which is
depicted on Exhibit A-1.
o install two (2) in-floor dock levelors (Kelly 6' x 8' -
30,000 lb. capacity or McGuire (MKA) - 25,000 lb.
capacity) at mutually agreed upon location.
o construct an additional restroom facility with two
toilets and a urinal per Exhibit A-2.
o construct a sink and counter area with two electrical
outlets per Exhibit A-2.
On or before the commencement date, Sublessor shall deliver
the Premises in broom clean condition, with all water,
sewer, electrical, gas, HVAC (office), sprinkler (ESFR),
roof (30' clear), dock doors, floors (6" thick), and
standard freeze protection units in good working order and
condition.
EARLY OCCUPANCY: Commencing upon sublease execution, Tenant shall
have temporary occupancy of the Premises without charge for
rent for the purpose of storing product, installing
equipment, phone or data lines. Such early occupancy shall
not interfere with Sublessor's improvements.
SUBLEASE RENT The base monthly rental for the 210,000 SF space shall be
SCHEDULE: $71,400.00 monthly per the following schedule (prorated for
the month in which the Commencement Date occurs, if the
Commencement Date is not the 1st day of the month).
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ADDENDUM TO REAL ESTATE SUBLEASE
DATED SEPTEMBER 8, 1999
BETWEEN 800.COM, INC., AS SUBLESSEE,
AND A & M WAREHOUSES, INC., AS SUBLESSOR
<TABLE>
<CAPTION>
Initial Term Rent Schedule
- --------------------------
<S> <C> <C>
Months 1-12: $71,400/month ($.34/sf), NNN
Months 13-18: $75,600/month ($.36/sf), NNN
</TABLE>
<TABLE>
<CAPTION>
Extension Term Rent Schedule
- ----------------------------
<S> <C> <C>
Months 19-22 $71,400/month ($.34/sf), NNN
Months 23-34 $73,500/month ($.35/sf), NNN
Months 35-46 $75,600/month ($.36/sf), NNN
Months 47-58 $77,700/month ($.37/sf), NNN
Months 59-60 $79,800/month ($.38/sf), NNN
</TABLE>
The rental stated above is net rental, and it is understood
that as additional rent are all direct expenses (operating
expenses) equal to 40.2% of the operating costs incurred by
the Sublessor throughout the sublease term, subject to the
terms of Section 6.2 of the sublease.
BALLOON PAYMENT: Provided Sublessee vacates the Premises at the
conclusion of the initial term of the sublease, Sublessee
shall pay to Sublessor a balloon payment equal to $29,310.00
which represents an unamortized Tenant Improvement
allowance.
SUBLESSEE'S Sublessee shall be responsible for insuring its own contents
RESPONSIBILITIES and for obtaining liability insurance during the lease term
AND EXPENSES: and shall provide proof of insurance prior to occupancy.
MUTUAL WAIVER OF Anything in this Sublease to the contrary notwithstanding,
SUBROGATION: Sublessor and Sublessee hereby waive and release each other
of and from ant and all rights of recovery, claim, action or
cause of action, against each other, their partners, agents,
officers and employees, for any loss or damage that may
occurs to the Premises, Master Premises or building, or
personal property therein, that is covered by valid and
collectible insurance in effect at the time of such loss or
damage regardless of cause of origin, including negligence
of Sublessor or Sublessee and their partners, agents,
officers and employees. Sublessor and Sublessee agree to
give immediately to their respective insurance companies
which have issued policies of insurance covering any risk of
direct physical loss, written notice of the terms of the
mutual waivers contained in this Section.
PAGE 7
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ADDENDUM TO REAL ESTATE SUBLEASE
DATED SEPTEMBER 8, 1999
BETWEEN 800.COM, INC., AS SUBLESSEE,
AND A & M WAREHOUSES, INC., AS SUBLESSOR
SUBLEASE Provided Sublessee is not in default of the Sublease
EXPANSION: agreement, Tenant shall have a right to expand into an
additional 100,000 SF of adjacent space as depicted on
Exhibit Al attached hereto. The rate of such expansion space
will be based on an initial shell rate of $.33/sf and
adjusted annually (August) by 3%. Sublessee shall provide
thirty (30) days written notice of their intent to expand,
and Sublessor shall utilize their best efforts to
accommodate such expansion. Sublessee shall be responsible
for any expenses involved with such expansion, such as
relocation of product, moving or adding demising walls, etc.
Also, the parties understand that Sublessor (AMWI) is a
logistics provider and may be able to accommodate an
expansion request by providing mutually beneficial
third-party logistics services.
SUBLEASE Throughout the Sublease term, Sublessee shall have the right
EXTENSION: to extend the sublease for a term equal to five (5) years
from the Commencement Date. The rental rate for such
extension will be adjusted to $.34/sf (NNN) at the time of
extension commencement, and will provide a three percent
(3%) annual increase. Sublessee shall provide five (5) month
written notice of such intent to extend the sublease term.
UTILITIES: In the event utilities serving the Premises are separately
metered, Sublessee shall pay all charges for utilities
consumed by Sublessee in the Premises, as separately
metered, to the applicable utility company. In the event
such utilities are not separately metered, Sublessee shall
pay its proportionate share of such utilities to Sublessor,
as determined based on the number of square feet in the
Premises and taking into account Sublessee's use thereof.
PAGE 8
<PAGE> 9
ADDENDUM TO REAL ESTATE SUBLEASE
DATED SEPTEMBER 8, 1999
BETWEEN 800.COM, INC., AS SUBLESSEE,
AND A & M WAREHOUSES, INC., AS SUBLESSOR
CASUALTY AND In the event of fire of other casualty damage to the
CONDEMNATION: Premises or any material portion thereof, that cannot be
repaired of otherwise restored within ninety (90) days of
such damage and that materially and adversely affect
Sublessee's use of the Premises, Sublessee shall have the
right to terminate the Sublease upon written notice to
Sublessor. If this Sublease is not so terminated, Rent due
hereunder shall abate until such time as the Premises is
restored and again useable by Sublessee. In the event of a
condemnation of any material portion of the Premises, such
that the remained of the Premises is not useable by
Sublessee for the use specified in this Sublease, Sublessee
shall have the right to terminate this Sublease upon written
notice to the Sublessor. If this Sublease is not terminated,
Rent shall be adjusted on a pro rata basis based on the
number of square feet in the Premises so condemned.
PAGE 9
<PAGE> 10
ADDENDUM TO REAL ESTATE SUBLEASE
DATED SEPTEMBER 8, 1999
BETWEEN 800.COM, INC., AS SUBLESSEE,
AND A & M WAREHOUSES, INC., AS SUBLESSOR
In the event of any conflict between the terms of this Addendum and the
Sublease, the terms of this Addendum shall prevail.
Sublessor: A & M Warehouses, Inc. Sublessee: 800.COM, Inc.
By: /s/ Nick Harbert By: /s/ Ken La Honta
-------------------------------- -------------------------------
Nick Harbert
Title: President Title: VP Finance CFO
Address: 5002 D Street, NW Address: 1516 NW Thurman
Auburn, WA 98001 Portland, OR 97209
Date: 9/8/99 Date: 9/10/99
PAGE 10
<PAGE> 11
ADDENDUM TO REAL ESTATE SUBLEASE
DATED SEPTEMBER 8, 1999
BETWEEN 800.COM, INC., AS SUBLESSEE,
AND A & M WAREHOUSES, INC., AS SUBLESSOR
EXHIBIT A-1
SITE PLAN
[GRAPHIC]
PAGE 11
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ADDENDUM TO REAL ESTATE SUBLEASE
DATED SEPTEMBER 8, 1999
BETWEEN 800.COM, INC., AS SUBLESSEE,
AND A & M WAREHOUSES, INC., AS SUBLESSOR
EXHIBIT A-2
FLOOR PLAN
[GRAPHIC]
PAGE 12
<PAGE> 1
EXHIBIT 10.7
December 30, 1999
Dear Bob:
We are pleased to offer you an opportunity to join 800.COM, as soon as possible.
The details of this offer are listed below. This offer supercedes any prior
offers.
Company: 800.COM is an online Internet retailer of consumer
electronics.
Position: Senior Vice President, Chief Financial Officer
Compensation: $250,000 per year is your target compensation based on a
100% performance level, with a potential to over-perform.
This includes a base salary and bonus opportunity as
follows:
Base Salary: $200,000 per year.
Bonus Opportunity: $50,000 annual opportunity at a 100%
performance level, with the potential to over-perform.
Criteria to be determined and agreed upon within a 30-day
period. Incentive to be paid quarterly, beginning April
2000.
Stock Options: Pending approval by the board of directors, you
will be granted an option to purchase 300,000 shares of
common stock of 800.COM, which will vest 100% over a 4-year
period. As a key executive in the company, your options will
be eligible for accelerated vesting due to a change of
control as outlined in the final stock option plan.
Start Date: January 5, 2000, or as soon as possible.
Termination: If you are terminated without cause, you will receive 180
days severance pay at your base rate of pay.
Benefits: 800.COM insurance programs and other benefits as outlined in
the 800.COM employee handbook.
<PAGE> 2
Bob, the executive staff and I are very excited about the opportunity for you to
join us and take 800.COM to its next level of performance. We look forward to a
great journey together.
This offer is subject to written and signed approval by both parties, and
expires on January 4, 2000, 5pm. Although we plan our association with you will
be long lasting, 800.COM is an "at will" employer and nothing in this offer
letter may be construed as a contract of employment. Just as you will be free to
terminate your employment with 800.COM for any reason, 800.COM reserves the
right to terminate employment with or without cause. Please acknowledge your
acceptance of this offer by signing where indicated below.
Best regards, Accepted by:
/s/ Greg Drew Date: 12-30-99 /s/ Bob Falcone Date: 1-5-00
- --------------------------------- -----------------------------------
Greg Drew, CEO Bob Falcone
800.COM, Inc.
<PAGE> 1
EXHIBIT 10.8
January 11, 1999
Mr. Frank Sadowski
10155 Bubbling Brook Place
Pickerington, OH 43147
Dear Frank:
We are pleased to offer you an opportunity to join 800.COM, as soon as possible.
The details of this offer are listed below.
Company: 800.COM is an online Internet retailer of consumer
electronics.
Position: Vice President, Merchandising
Base Salary: $150,000 per year.
New Hire Bonus: You will receive a $20,000 new hire bonus within 30 days of your
hire date. Should you leave 800.COM prior to completing 12 months of employment,
you agree to repay within 12 months of your separation from 800.COM an amount
equal to 1/12 of the new hire bonus for each month remaining between your
separation date and your anniversary date.
Cash Incentive: $50,000 opportunity (annual) at 100% of performance, with the
potential to over-perform; criteria to be determined and agreed upon within a
30-day period. Incentive to be paid quarterly, beginning March, 1999.
Stock Options Pending approval by the board of directors, you will be granted an
option to purchase 125,000 shares of common stock of 800.COM, which will vest
100% over a 4-year period. As a key executive in the company, your options will
be eligible for accelerated vesting due to a change of control as outlined in
the final stock option plan.
Start Date: January 14, 1999.
Relocation: Moving expense allowance estimated at $15,000 for the movement of
customary household goods to the Portland area. Moving expenses will be
reimbursed upon receipt by 800.COM of itemized receipts.
Relocation (cont'd.) Temporary housing expense allowance not to exceed $7,500
for the cost of temporary housing in the Portland area. Temporary housing
expenses will be reimbursed upon receipt by 800.COM of itemized receipts.
Family Travel: Family travel expense allowance not to exceed $5,000 for the cost
of travel between Ohio and Oregon by you and/or your family. Family travel
expenses will be reimbursed upon receipt by 800.COM of itemized receipts.
Termination: If you are terminated without cause, you will receive 90 days
severance pay at your base rate of pay.
<PAGE> 2
Benefits: 800.COM insurance programs and other benefits as outlined in the
800.COM employee handbook.
Frank, the executive staff and I are very excited about the opportunity for you
to join us and take 800.COM to its next level of performance. We look forward to
a great journey together.
This offer is subject to written and signed approval by both parties, and upon a
complete reference check with satisfactory results. Although we hope our
association with you will be a long one, 800.COM is an "at will" employer and
nothing in this offer letter may be construed as a contract of employment. Just
as you will be free to terminate your employment with 800.COM for any reason,
800.COM reserves the right to terminate employment with or without cause.
This employment agreement must be signed on or before January 12, 1999, 5:00
p.m. Please acknowledge your acceptance of this offer by signing where indicated
below.
Best regards,
Accepted by:
/s/ Greg Drew Date: /s/ Frank Sadowski Date:
- ------------------------------- ---------------------
Greg Drew, CEO Frank Sadowski
800.COM, Inc.
GLD:mbm
cc: Spencer Brown, CFO
Susan McFarlan, Controller
<PAGE> 1
EXHIBIT 10.9
June 23, 1999
Mr. Tim Zuckert
16820 Calle de Sarah
Pacific Palisades, CA 90272
Dear Tim:
We are pleased to offer you an opportunity to join 800.COM. The details of this
offer are listed below.
Position: Vice President, Marketing, reporting to the President, CEO.
Base Salary: $175,000 per year.
Cash Incentive: $25,000 opportunity (annual) at 100% of performance, with
the potential to over-perform; criteria to be determined and
agreed upon within a 30-day period. Incentive to be paid
quarterly, beginning October, 1999.
New Hire Bonus: You will receive a $30,000 new hire bonus within 30 days of
your hire date. Should you leave 800.COM prior to completing
12 months of employment, you agree to repay within 12 months
of your separation from 800.COM an amount equal to 1/12 of
the new hire bonus for each month remaining between your
separation date and your anniversary date.
Stock Options Pending approval by the board of directors, you will
be granted an option to purchase 235,000 shares of common
stock of 800.COM, which will vest 100% over a 4-year period.
As a key executive in the company, your options will be
eligible for accelerated vesting due to a change of control
as outlined in the final stock option plan.
Start Date: As soon as possible, with a target start date of
Monday, July 12, 1999.
<PAGE> 2
Relocation: The Vice President, Marketing position is based at 800.COM
headquarters in Portland, Oregon. This results in the need
for you to relocate from Southern California. In connection
with your relocation, 800.COM will pay for the movement of
customary household goods to the Portland area. Moving
expenses will be reimbursed upon receipt by 800.COM of
itemized receipts.
800.COM will also provide a temporary housing expense
allowance for a period of 90 days, not to exceed $7,500, for
the cost of temporary housing in the Portland area.
Temporary housing expenses will be reimbursed upon receipt
by 800.COM of itemized receipts.
Family Travel: A family travel expense allowance will be provided
for a period of 90 days, not to exceed $5,000 for the cost
of travel between Los Angeles and Portland by you and/or
your family. Family travel expenses will be reimbursed upon
receipt by 800.COM of itemized receipts.
Termination If you are terminated without cause, you will receive 180
days severance pay at your base rate of pay. If you
terminated without cause prior to completing 12 months of
employment, you will be entitled to a moving expense
allowance of up to $20,000 if you relocate from the Portland
area. Moving expenses will be reimbursed upon receipt by
800.COM of itemized receipts.
Benefits: 800.COM insurance programs and other benefits as outlined in
the 800.COM employee handbook
This offer is subject to written and signed approval by both parties, and upon a
complete reference check with satisfactory results. Although we hope our
association with you will be a long one, 800.COM is an "at will" employer and
nothing in this offer letter may be construed as a contract of employment. Just
as you will be free to terminate your employment with 800.COM for any reason,
800.COM reserves the right to terminate employment with or without cause.
Any controversies or claims arising in connection herewith shall be settled by
arbitration in accordance with the rules of the American Arbitration Association
then in effect. Any such arbitration shall take place in Portland, Oregon. The
prevailing
<PAGE> 3
party in any such arbitration shall be entitled to costs, expenses and
reasonable attorney's fees, and judgment upon the award rendered may be entered
in any court having appropriate jurisdiction.
This offer letter must be signed on or before June 28, 1999, 5:00 p.m. Please
acknowledge your acceptance of this offer by signing where indicated below.
Tim, the executive staff and I are very excited about the opportunity for you to
join us and take 800.COM to its next level of performance. We look forward to a
great journey together.
Best regards,
Accepted by:
/s/ Greg Drew Date: 6/26/99 /s/ Tim Zuckert Date: 6/23/99
- ---------------------------------- -----------------------------------
Greg Drew, President, CEO Tim Zuckert
800.COM, Inc.
GLD:mbm
cc: Susan McFarlan Controller
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated March 15, 2000, except as to Note 13, which is as of March 22,
2000, relating to the financial statements of 800.COM, Inc. which appear in
such Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Portland, Oregon
March 22, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN 800.COM, INC.'S REGISTRATION STATEMENT FILED WITH THE
COMMISSION ON MARCH 23, 2000.
</LEGEND>
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