<PAGE>
As filed with the Securities and Exchange Commission on March 3, 1999
Registration No. 333-68761
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ROWECOM INC.
(Exact name of registrant as specified in its charter)
DELAWARE 5961 04-3370008
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Numbers) Identification No.)
incorporation or
organization)
RoweCom Inc.
725 Concord Avenue
Cambridge, MA 02138
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Richard R. Rowe, Ph.D.
Chairman of the Board, President
and Chief Executive Officer
RoweCom Inc.
725 Concord Avenue
Cambridge, MA 02138
(617) 497-5800
(Name, address, including zip code, and telephone number, including area code
of agent for service)
with copies to:
Brian Keeler, Esq. Winthrop B. Conrad, Jr., Esq.
Johan V. Brigham, Esq. Davis Polk & Wardwell
Bingham Dana LLP 450 Lexington Avenue
150 Federal Street New York, New York 10017
Boston, Massachusetts 02110 (212) 450-4000
(617) 951-8000 Facsimile No. (212) 450-4800
Facsimile No. (617) 951-8736
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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, as amended, 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, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Dated March 3, 1999
Prospectus
3,100,000 Shares
Common Stock
(Par value $.01 per share)
RoweCom Inc. is offering 3,100,000 shares of its common stock. This is our
initial public offering and no public market currently exists for our common
stock. We estimate that the initial public offering price will be between $12
and $14 per share.
We have filed an application to qualify the common stock for quotation on the
Nasdaq National Market under the symbol "ROWE."
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
<TABLE>
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<CAPTION>
Underwriting
Discounts and Proceeds
Price to other Estimated to
Public Offering Costs Company
- ----------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- ----------------------------------------------
Total $ $ $
- ----------------------------------------------
</TABLE>
RoweCom has granted the underwriters the right to purchase up to an additional
465,000 shares of common stock to cover overallotments.
J.P. Morgan & Co.
CIBC Oppenheimer
Volpe Brown Whelan & Company
, 1999
<PAGE>
ART
[Heading which reads "Connecting businesses with the world's most
comprehensive Internet source of books and subscriptions." On the left hand
side, a column of artwork depicting individuals in a corporate environment,
captioned "Business and Employees." On the right hand side, a column of
various magazine covers, captioned "Books and Subscriptions." Both columns
have arrows pointing towards a center circle which reads "RoweCom Business to
Business e-commerce." Below are corporate logos with the caption "Strategic
Alliances and Partners."]
[A listing of selected clients grouped by industry and various control
benefits for clients. Artwork depicting the Arthur Andersen kStore home page,
an example of a report generated by the kStore, and various magazine covers.]
[A listing of client benefits, such as convenience and cost savings, and
publisher benefits. Artwork depicting the kStore Web pages and various
magazine covers.]
[Artwork depicting the kStore transaction model with footnotes that describe
each step and various magazine covers.]
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 4
Forward-looking Statements.......... 13
Use of Proceeds..................... 14
Dividend Policy..................... 14
Capitalization...................... 15
Dilution............................ 16
Selected Financial Information...... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 19
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business.............................................................. 28
Management............................................................ 38
Transactions Among Related Parties ................................... 45
Principal Stockholders................................................ 47
Description of Capital Stock.......................................... 49
Underwriting.......................................................... 52
Shares Eligible for Future Sale....................................... 54
Legal Matters......................................................... 55
Experts............................................................... 55
Available Information................................................. 55
Index to Consolidated Financial Statements............................ F-1
</TABLE>
----------------
In deciding whether to buy our common stock, you should rely only on the
information contained in this prospectus. To understand this offering fully,
you should read this entire prospectus carefully, including the financial
statements and notes. We have included a brief overview of the most significant
aspects of the offering itself in the Prospectus Summary. However, individual
sections of the prospectus are not complete and do not contain all of the
information that you should consider before investing in RoweCom's common
stock. We have not authorized anyone to provide you with information 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 contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or of any sale of the common stock.
We intend to furnish to our stockholders annual reports containing audited
financial statements and quarterly reports containing unaudited interim
financial information for the first three quarters of each fiscal year.
Until , all dealers that buy, sell or trade RoweCom common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
(i)
<PAGE>
Prospectus Summary
RoweCom is the leading business-to-business provider of e-commerce solutions
for purchasing and managing the acquisition of magazines, newspapers, journals,
books and other printed sources of commercial, scientific and general interest
information and analysis. These products are referred to as "knowledge
resources" in the information industry and in this prospectus. We offer our
clients and their employees easy and convenient access to the largest catalog
of such knowledge resources on the Internet. We also provide businesses with a
highly effective means of managing and controlling purchases of knowledge
resources and reducing costs. We target clients in knowledge-intense
industries, such as financial and professional services, high technology and
healthcare, as well as selected academic and non-profit institutions.
Information has become increasingly critical in most industries. This has been
reflected by rapid growth in the quantity and degree of specialization of
knowledge resources, as well as in the number of employees utilizing such
resources. As a result, businesses are spending increasingly significant
amounts on knowledge resources. In addition, many individual employees purchase
knowledge resources directly from publishers or through consumer online
services rather than through a corporate library or centralized purchasing
group. Despite these changes, the means by which most businesses and
institutions acquire knowledge resources has not evolved significantly and
still involves a manually intensive, paper based process.
RoweCom's flagship product, the kStore(TM), addresses these problems by
facilitating decentralized purchasing of knowledge resources by businesses and
their employees while at the same time giving management the tools required to
effectively control knowledge resource purchases. The kStore provides
businesses with a single comprehensive source for the purchase of knowledge
resources, and allows individual employees to find, order, and pay for
knowledge resources quickly and conveniently. At the same time, the kStore
provides managers with detailed reports of knowledge resource purchases by
their employees, permits them to institute customized approval procedures, and
reduces the costs of purchasing knowledge resources.
RoweCom has grown rapidly since it began operations in 1994. RoweCom's revenues
have increased from $3.1 million in 1996 to $19.1 million in 1998. Most of this
growth has resulted from our direct selling efforts, which we intend to expand.
We have also increased the number of distribution channels available to us and
rapidly increased the size of our catalog through strategic alliances with
content providers and knowledge resource marketers. In August 1998, we entered
into a five-year agreement with barnesandnoble.com to combine and jointly
market our respective catalogs to business customers. We have also entered into
strategic alliances with NewSub Services, Intelisys Commerce and Publications
Research Group. These alliances generally allow us to share content with our
strategic partners, market one another's catalogs of knowledge resource titles
and share revenue. We plan to continue to pursue additional strategic
alliances.
We intend to maintain and strengthen our position as the leading business-to-
business provider of e-commerce solutions for purchasing and managing the
acquisition of knowledge resources. Key elements of our strategy include:
. Increasing our client base and the number of individuals accessing the
kStore from desktop computers at existing clients.
. Increasing the content and functionality of the kStore.
. Developing additional strategic alliances to increase our channels of
distribution and available content.
. Enhancing the kStore's brand recognition through Web based advertising,
traditional advertising and attendance and presentations at major trade
shows.
. Expanding internationally through alliances with, or acquisitions of,
foreign content providers.
In seeking to maintain and strengthen our competitive position, we face a
number of important challenges. Our business is not yet profitable--we had an
accumulated deficit of $13.9 million at December 31, 1998--and we need to
increase sales significantly if we are to become profitable. In addition, we
have not yet faced significant competition in the e-commerce, business-to-
business market from any other company providing a similar package of knowledge
resource content and management tools. We expect that such competition may
emerge in 1999 and could adversely affect our growth. For a discussion of risks
of investing in our common stock, see "Risk Factors," beginning on page 4.
1
<PAGE>
The Offering
<TABLE>
<C> <S>
Common Stock Offered......................... 3,100,000 shares
Common Stock Outstanding after the Offering.. 9,630,416 shares
Over-allotment Option........................ 465,000 shares
Use of Proceeds.............................. Assuming an initial public
offering price of $13 per share,
the mid-point of the range set
forth on the cover page of this
prospectus, RoweCom will receive
net proceeds from this offering,
after deducting expenses, of
approximately $36.7 million, or
$42.3 million if the
underwriters purchase all of the
shares they are entitled to
purchase to cover over-
allotments. See "Underwriting."
We intend to use these proceeds
for working capital and general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol....... "ROWE"
</TABLE>
Unless otherwise indicated, the share information in the table above excludes
up to 465,000 shares that may be issued to the underwriters to cover over-
allotments. See "Underwriting."
The table reflects 5,004,236 shares of common stock issuable upon the
consummation of this offering as a result of the conversion of all outstanding
shares of all series of preferred stock of RoweCom, and the exercise of all
outstanding stock purchase warrants. See "Transactions Among Related Parties"
and "Principal Stockholders."
The table excludes 2,018,687 shares reserved for future issuance under
RoweCom's stock option and stock purchase plans and other options granted
outside of such plans. We have granted options to purchase 602,966 of such
shares and 163,584 of such options will be exercisable upon consummation of
this offering. See "Capitalization" and "Management--Stock Incentive Plans."
All references to shares of common stock in this prospectus reflect the impact
of a .34905-for-1 reverse stock split of the common stock declared by RoweCom's
board of directors on February 8, 1999.
--------------
Our principal executive office is located at 725 Concord Avenue, Cambridge,
Massachusetts 02138 and our telephone number is 617-497-5800. Our corporate Web
site address is http://www.rowe.com. Information contained on our Web site is
not part of this prospectus.
2
<PAGE>
Summary Financial Information
The following table contains summary consolidated financial data of RoweCom
which should be read together with RoweCom's consolidated financial statements
and related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Pro forma per share amounts in the table below reflect the common stock
outstanding during each period plus the common stock to be issued at the
closing of this offering in connection with the conversion of preferred stock
and the exercise of warrants. For a more complete explanation of how pro forma
per share amounts have been calculated, you should read "Selected Financial
Information."
The "Pro forma as adjusted" column in the second table below reflects the
conversion of preferred stock and exercise of warrants described above plus the
sale by RoweCom of 3,100,000 shares of common stock at an assumed initial
public offering price of $13 per share, the mid-point of the range set forth on
the cover page of this prospectus. For a more complete explanation of how the
amounts in the "Pro forma as adjusted" column were calculated, you should read
"Selected Financial Information."
<TABLE>
<CAPTION>
----------------------------------------------
Year Ended December 31,
----------------------------------------------
1995 1996 1997 1998
---------- ---------- ---------- ----------
Dollars in thousands, except per
share data
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues.......................... $ 324 $ 3,116 $ 12,890 $ 19,053
Cost of revenues.................. 323 3,083 12,701 18,736
---------- ---------- ---------- ----------
Gross profit.................. 1 33 189 317
Operating expenses:
Sales and marketing.............. 259 585 2,035 4,817
Research and development......... 149 532 584 1,631
General and administrative....... 171 351 751 1,561
---------- ---------- ---------- ----------
Total operating expenses........ 579 1,468 3,370 8,009
---------- ---------- ---------- ----------
Loss from operations.......... (578) (1,435) (3,181) (7,692)
Interest and other income, net.... 1 1 64 172
---------- ---------- ---------- ----------
Loss before income taxes...... (577) (1,434) (3,117) (7,520)
Provision for income taxes........ 8 16 137 109
---------- ---------- ---------- ----------
Net loss...................... $ (585) $ (1,450) $ (3,254) $ (7,629)
========== ========== ========== ==========
Basic and diluted pro forma net
loss per share................... -- -- -- $ (1.87)
Shares used in pro forma net loss
per share calculation............ 4,077,075
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------
As of December 31, 1998
----------------------------
As of December 31, Pro Forma
1997 Actual as adjusted
------------------ ------------ --------------
<S> <C> <C> <C>
Dollars in thousands
Consolidated Balance Sheet
Data:
Working capital............... $ 185 $ 15,447 $52,326
Total assets.................. 2,108 20,284 57,163
Redeemable preferred stock.... 4,298 28,423 --
Total stockholders' (deficit)
equity....................... (3,768) (12,251) 53,051
</TABLE>
3
<PAGE>
Risk Factors
You should carefully consider the risks described below before deciding to
purchase shares of common stock. Although we believe that the risks and
uncertainties described below are the material risks currently facing our
company, such risks and uncertainties are not the only ones that we will face.
If any of the following risks occurs, our business, financial condition or
results of operations could be materially adversely affected. In such case, the
trading price of our common stock could decline, and you could lose all or part
of your investment.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including the risks described below and elsewhere in this prospectus.
See "Forward-looking Statements."
Risks Particular to RoweCom
We have had an extremely limited operating history and are subject to the risks
of start-up companies.
We began operations in 1994, did not generate significant revenues until March
1996 and began offering the kStore, our flagship product, in June 1997.
Consequently, we have an extremely limited operating history and our prospects
are subject to the risks and uncertainties frequently encountered by start-up
companies, particularly in the new and rapidly evolving markets for Internet
products and services. These risks include:
. the failure to maintain our leadership position through enhancement of
our services and catalog of magazines, newspapers, journals, books and
other knowledge resources;
. the failure to significantly and rapidly increase our client base;
. the development by competitors of services similar or superior to the
services we offer;
. the failure to increase penetration of our existing client base;
. the failure of businesses to widely adopt intranets and the Internet as
means for purchasing subscriptions and books; and
. the inability to identify, attract, retain and motivate qualified
personnel.
We may not be successful in addressing these risks and our failure to do so
could have a material adverse effect on our future results of operations and
financial condition.
We have a history of losses and will probably continue to incur net losses.
We have not achieved profitability on a quarterly or annual basis to date and
anticipate that we will continue to incur net losses for at least the near to
medium term. As of December 31, 1998, we had an accumulated deficit of $13.9
million. Although we have experienced revenue growth in recent periods, our
revenues may not continue at their current level or increase in the future. We
establish our expenditure levels for product development, sales and marketing
and other operating expenses based, in large part, on expected future revenues.
We currently expect to increase our operating expenses significantly in
connection with expansion of our sales and marketing operations and continued
development of our services and catalog. To the extent that these expenses are
not promptly followed by increased revenues, our future results of operations
and financial condition could be materially and adversely affected.
Our growth in revenue is not a reliable indicator of our prospects.
Our extremely limited operating history and the uncertain nature of the markets
in which we compete make the prediction of future results of operations
difficult or impossible. Therefore, our recent revenue growth should not be
taken as indicative of the rate of revenue growth, if any, that can be expected
in the future. We believe that period-to-period comparisons of our results
should not be relied upon as an indication of future performance.
We currently receive substantially all of our revenues from a single product--
the kStore.
We currently derive substantially all of our revenues from the kStore and we
expect that kStore-related revenues will continue to account for a significant
portion of our revenues for the foreseeable future. A decline in demand for the
kStore or the inability of the kStore to penetrate new markets as a result of
competition, technological change or other factors would have a material
adverse effect on our future results of operations and financial condition.
4
<PAGE>
Our prospects depend in part on the success of our strategic alliance with
barnesandnoble.com.
In August 1998, we entered into a strategic alliance agreement with
barnesandnoble.com llc. We are depending on this alliance for access to a broad
catalog of books to which we would not otherwise have access on comparable
terms. If this alliance does not generate significant levels of revenue, our
prospects would be adversely affected to a material extent. We have only
recently begun to put the alliance into practice and its benefits to RoweCom
have yet to be established. Under the agreement with barnesandnoble.com, we are
able to sell barnesandnoble.com's catalog of books and they are able to sell
our catalog of knowledge resources. For a description of the agreement, see
"Business--Strategic Alliances--barnesandnoble.com Relationship." The agreement
expires in five years, or may be terminated earlier by one or both of the
parties under certain circumstances, such as:
.failure to agree upon a development plan on schedule;
.material breach of the agreement;
.change of control other than an initial public offering by either party;
or
.failure to meet minimum sales targets.
Because we have only recently entered into this agreement, we cannot be sure
that the agreement will prove beneficial to us. In particular, we cannot be
sure that the barnesandnoble.com Business Solutions service, which commenced
operations in third quarter of 1998 and currently has a limited client base,
will generate a sufficient number of sales to make the strategic alliance
beneficial to RoweCom as a distribution channel. In addition, we cannot be
certain that the agreement will not be terminated prior to the initial five-
year term or renewed after five years. We have agreed with barnesandnoble.com
on two occasions to extend the deadline to agree upon a development plan. In
the event the agreement is terminated or not renewed, it is possible that we
will not be able to develop a relationship with another company to obtain
access on comparable terms to the catalog of books currently provided by
barnesandnoble.com. If the agreement is terminated or we are unable to renew
the agreement or otherwise obtain access to such content on acceptable terms,
our future financial results could be materially adversely affected.
We depend in part on unproven strategic alliances for growth.
We have recently entered into several other important strategic alliances and
our prospects depend significantly upon the development of these relationships.
These relationships are described under "Business--Strategic Alliances." If
these and any future strategic relationships into which we are able to enter do
not generate significant levels of revenue, or are terminated or expire, our
ability to become profitable could be adversely affected to a material extent.
We intend to continue to actively seek strategic partners and are relying on
such partnerships to generate a significant portion of RoweCom's growth in the
medium term. RoweCom's current strategic relationships are new and as yet
unproven.
If our marketing and content arrangements with our strategic partners were
lessened, curtailed, or otherwise modified, we might not be able to replace or
supplement such marketing efforts or the content provided by such partners
alone or with other companies. If these partners, which do not currently
compete with us, were to reduce their joint marketing activities with us,
further develop and market their own business-to-business service for
purchasing and managing the acquisition of subscriptions and books, or market
such services developed by a competitor, our business, results of operations
and financial condition would be materially and adversely affected.
Our prospects depend on our ability to succeed against intense competition in
the knowledge resource sales market.
The market for the sale of magazines, newspapers, journals, books and other
knowledge resources to businesses is intensely and increasingly competitive. We
cannot be certain that we will maintain our competitive position against
current and potential competitors, especially the significant number of such
competitors with greater name recognition and client bases and greater
financial, marketing, service, support, technical and other resources than we
have.
We have not yet had significant direct competition from other companies
offering a service for purchasing and managing the acquisition of subscriptions
and books with management control features comparable to those of the kStore.
However, we expect that such competition will develop in the short term and it
may have an adverse impact on our business. Many of our competitors may be able
to respond more quickly to new or emerging
5
<PAGE>
technologies and changes in client requirements, and to devote greater
resources to the development, promotion and sale of their service than we can.
It is possible that our current or potential competitors will develop Internet-
based services superior to those we have developed or adapt more quickly than
we have to new technologies, evolving industry trends or changes in client
requirements. Our market is still evolving and we cannot be certain that we
will be able to compete successfully with current or future competitors, or
that competitive pressures faced by us will not have a material adverse effect
on our future results of operations and financial condition. See "Business--
Competition in the Knowledge Resource Industry."
We rely on a small number of clients and industries for substantially all of
our revenues.
A small number of our clients account for a substantial amount of our revenues.
Any failure by one or more of these clients to purchase knowledge resources
through the kStore could have a material adverse effect on our results of
operations and financial condition. Our five largest clients accounted for
32.3% and 29.4% of our revenues in 1997 and 1998, respectively. Our revenues
also are highly concentrated in a small number of industries. Clients in the
high technology sector were responsible for 26.6% of our revenues in 1998 and
17.6% in 1997. Clients in the health services sector were responsible for 31.0%
of revenues in 1998 and 33.2% in 1997. We cannot be certain that our top five
clients, or other clients, will continue to purchase knowledge resources
through the kStore or any other RoweCom service. In addition, our dependence on
clients in the high technology and health services sectors makes us vulnerable
to downturns in those sectors. Such a downturn could lead our clients in those
sectors to reduce their level of knowledge resource purchases, which could have
a material adverse effect on our financial condition and results of operations.
We depend on Reed Elsevier to supply us with a substantial number of the
knowledge resources we sell.
The primary supplier of the magazines and journals whose subscriptions we sell
is Reed Elsevier, which supplied titles accounting for 24.0% and 23.3% of our
sales in 1997 and 1998, respectively. We currently do not have a contract with
Reed Elsevier. If Reed Elsevier stops offering us knowledge resources on
favorable terms, we may not be able to offer clients competitive prices on
their orders. If Reed Elsevier were to cease to provide us with knowledge
resources, it would not be possible to obtain replacements for many of the
titles Reed Elsevier publishes at a comparable price, if at all, from another
supplier. Either of these events could have a material adverse effect on our
financial condition and results of operations. Similarly, if any of the other
publishers with whom we do business decided not to provide us with knowledge
resources or decided to stop providing us with knowledge resources on favorable
terms, it could have a material adverse effect on our financial condition and
results of operations.
Our quarterly revenues are likely to fluctuate, which may have an impact on our
stock price.
Our quarterly revenues, expenses and operating results have varied
significantly in the past and are likely to vary significantly from quarter to
quarter in the future. As a result, our operating results may fall below market
analysts' expectations in some future quarters, which could have a material
adverse effect on the market price of our stock. Delays in client orders can
cause RoweCom's revenues and results of operations to significantly fluctuate
from period to period. Quarterly fluctuations may also result from factors such
as:
. penetration of our existing clients;
. obtaining new accounts;
. changes in our operating expenses;
. changes in the mix of knowledge resources sold;
. increased competition; and
. general economic factors.
Based upon all of these factors, we believe that quarterly revenues, expenses
and operating results are likely to vary significantly in the future, that
period-to-period comparisons of results of operations are not necessarily
meaningful and that, as a result, such comparisons should not be relied upon as
indications of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Selected Quarterly Results of
Operations."
6
<PAGE>
We may not be able to expand our catalog of knowledge resources.
One of the key elements of our strategy is to continue to expand our catalog of
knowledge resources. We gain content both through entrance into strategic
alliances and through contact with various publishers as we receive
particular requests from clients. There can be no assurance that we will be
able to continue to gain available content through strategic alliances or
directly from publishers. In the event that we are unable to continue to
increase our available content, we may:
. be at a competitive disadvantage with respect to competitors that may
compile greater libraries of available titles;
. lose clients that rely upon us as a single-source of knowledge resources;
and
. be unable to increase the amount of revenue that is otherwise generated
from particular clients.
Any of these effects could have a material adverse effect on our future results
of operations and financial condition.
We may not be able to establish the value of a brand name.
We believe that establishing and maintaining the goodwill associated with our
brand name is a critical aspect of attracting and expanding our client base, as
well as of maintaining and building upon the competitive advantage of being the
first company to provide businesses with an Internet-based subscription and
book procurement system. We have not yet developed a strong brand name and if
we fail to do so it could have a material adverse impact on our business. The
importance of brand recognition will increase with competition. Promotion and
enhancement of the kStore brand will depend largely on our success in
continuing to provide high quality services, which cannot be assured. If users
do not perceive the kStore to be comprehensive and of high quality, or if we
introduce new features, or enter into new business ventures that are not
favorably received by users, we will risk diluting the value of our brand name.
If we are unable to provide high quality services, or otherwise fail to promote
and maintain our brand name, or if we incur excessive expenses in an attempt to
improve our services, or promote and maintain our brand name, our future
results of operations and financial condition could be materially and adversely
affected.
Our future success currently depends on the services of a small number of key
personnel.
Our future operating results depend in significant part upon the continued
services of a relatively small number of key technical and senior management
personnel, particularly Dr. Richard Rowe, our Chairman, President and Chief
Executive Officer. In addition our future results will depend significantly
upon the following key technical, sales and managerial employees:
. Louis Hernandez, Jr., Executive Vice President and Chief Financial
Officer;
. Steven Woit, Vice President, Content;
. Walter Crosby, Vice President and Chief Technical Officer; and
. Stephen Vozella, Vice President, Fulfillment.
There can be no assurance that we will retain our key employees or that we will
be successful in attracting, assimilating and retaining other highly qualified
technical, sales and managerial personnel in the future. The loss of any of our
key technical, sales and senior management personnel or the inability to
attract and retain additional qualified personnel could have a material adverse
effect on our future results of operations and financial condition. See
"Business--Employees."
We may have trouble expanding internationally
A part of our strategy is to expand into foreign markets. To date, we have had
only very limited experience in developing localized versions of our services
and in marketing and operating our services internationally. It may be
difficult for us to do so successfully in the future. In order to expand
overseas we intend to enter into relationships with foreign business partners.
We may experience difficulty in managing international operations because of
distance, as well as language and cultural differences, and there can be no
assurance that we or our future foreign business associates will be able to
successfully market and operate our services in foreign markets. We also
believe that, in light of substantial anticipated competition, it will be
necessary to implement our business strategy quickly in international markets
to obtain a significant share of the market. In addition, we
7
<PAGE>
do not currently have the content necessary to conduct operations in many
foreign markets. We will be unlikely to be able to penetrate such markets
unless we gain such content, either through partnerships with publishers or
other content-providers in such markets, or possibly through acquisitions.
We may lose clients if our systems fail.
The performance of our computer and telecommunications equipment is critical to
our reputation and achieving market acceptance of our services. Any system
failure, including network, software or hardware failure, that
causes interruption or an increase in response time of our online services
could result in decreased usage of our services. If such failures occur often,
it could reduce the attractiveness of our services to our users. An increase in
the volume of the kStore orders could strain the capacity of the hardware
employed by us, which could lead to slower response time or system failures.
Our operations are also dependent in part upon our ability to protect our
operating systems against physical damage from acts of God, power loss,
telecommunications failures, physical break-ins and similar events. The
occurrence of any of these events could result in interruptions, delays or
cessations in service to users of our services, which could have a material
adverse effect on our future financial results. Our property and business
interruption insurance may not be adequate to compensate us for all losses that
may occur.
All of our computer and telecommunications equipment is located at our network
facility in London, Ontario. We currently have no backup systems at other
sites. Accordingly, there is a significant risk to our operations from a
natural disaster or system failure at our London facility. We currently
anticipate that we will establish redundant systems in our Cambridge,
Massachusetts headquarters, or elsewhere, upon consummation of the offering.
There can be no assurances, however, that any such back-up systems will be
online soon after consummation of the offering, or at all.
We may not be able to provide services if the systems that we rely upon are not
Year 2000 compliant.
We are currently undergoing efforts to ensure that all business systems owned
or operated by us or by third parties, the failure of which would directly and
adversely affect our ability to provide our services or otherwise affect
revenues, safety or reliability for such a period of time as to lead to
unrecoverable consequences, will not fail or make miscalculations as a result
of the Year 2000 date change. Although we believe that most of our in-house and
licensed information technology, including our production systems and
accounting software, will not be affected by the Year 2000 date change, we
cannot be certain that the production systems of many of our strategic business
partners or the publishers from whom we purchase the newspapers, magazines,
journals and books that we sell to clients will not be adversely affected by
the Year 2000 date change. For a more complete discussion of the Year 2000
issue, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Impact of Year 2000 Issue on Operations and Financial
Condition of RoweCom."
Our revenues are seasonal in nature.
We have historically experienced seasonal fluctuations in revenues because
substantially all of our revenues have been generated in the fourth quarter of
each year when most subscriptions are purchased or renewed by our clients. This
pattern may be expected to continue, and interim results of financial
operations within any fiscal year cannot be expected to be representative. As a
strategic response to the concentration of orders in the fourth quarter, we may
from time to time make pricing, servicing or marketing decisions that could
have a material adverse effect on our future financial results.
Our success depends on our ability to continuously enhance our product
offerings.
Our future success will depend on our ability to enhance our current products
and to continue to develop and introduce new products and services that keep
pace with competitive product introductions and technological developments,
satisfy diverse and evolving client requirements and otherwise achieve market
acceptance. In particular, we believe that our future success will be
dependent, in large part, upon market acceptance of the most recent version of
the kStore. We cannot be certain that we will be successful in developing and
marketing on a timely and cost-effective basis future services or service
enhancements, or offer new services that respond to technological advances. Any
failure by us to anticipate or respond adequately to changes in technology and
client preferences, or any significant delays in other development efforts,
could have a material adverse effect on our future results of operations and
financial condition.
8
<PAGE>
Future acquisitions could harm our business.
We evaluate potential acquisitions on an ongoing basis. Acquisitions pose many
risks, including that:
. we may not be able to compete successfully for available acquisition
candidates, complete future acquisitions or accurately estimate the
financial effect on our company of any businesses we acquire,
. future acquisitions may require us to spend significant cash amounts or
may decrease our operating income,
. we may have trouble integrating the acquired business and retaining
personnel,
. acquisitions may disrupt our business and distract our management from
other responsibilities, and
. to the extent that any of the companies which we acquire fail, our
business could be harmed.
We may have difficulty in managing growth.
Our business has grown rapidly in the last four years and must continue to do
so in order for us to become profitable. Total revenues have increased from
$324,000 in 1995 to $19.1 million in 1998, the number of our employees has
grown from 9 at December 31, 1995 to 101 at December 31, 1998, and the scope of
our operating and financial systems has expanded significantly. This recent
rapid growth has placed and, if sustained, will continue to place, a
significant strain on our management and operations. Accordingly, our future
operating results will depend on the ability of our officers and other key
employees to continue to implement and improve our operational, client support
and financial control systems, and effectively expand, train and manage our
employee base. We cannot be certain that we will be able to manage any future
expansion successfully, and any inability to do so would have a material
adverse effect on our future results of operations and financial condition.
Risks Typical of E-Commerce Companies
The possible slow adoption of Internet and intranet solutions by businesses may
harm our prospects.
In order for us to be successful, intranets must continue to be adopted by
businesses as the means of making information and electronic services available
to employees. In addition, the Internet must continue to be adopted as an
important means of buying and selling products and services. Because intranet
and Internet usage is continuing to evolve, it is difficult to estimate with
any assurance the size of this market and its growth rate, if any. To date,
many businesses have been deterred from utilizing intranets and the Internet
for a number of reasons, including:
.security concerns;
.limited access to the corporate intranet;
.lack of availability of cost-effective, high-speed service;
.inconsistent quality of service;
.potentially inadequate development of network infrastructure;
.the inability to integrate business applications on these networks; and
.the need to operate with multiple and frequently incompatible products.
Businesses may not broadly accept electronic procurement of knowledge
resources, which could limit possible growth in our revenues.
Even if the Internet and intranets are widely adopted, the adoption of these
networks for book and subscription procurement, particularly by companies that
have relied on traditional means of procurement, will require broad acceptance
of the new approach. In addition, companies that have already invested
substantial resources in traditional methods of procurement may be reluctant to
adopt a new strategy. See "Business--Industry Overview."
The Internet may not be able to accommodate growth in e-commerce for companies
such as RoweCom.
We depend upon the Internet to conduct our business and any problems in the
functioning of the Internet could adversely affect our business. To the extent
that the Internet continues to experience significant growth in the number of
users, their frequency of use or their speed and quality-of-service
requirements, it is possible that the infrastructure for the Internet will not
be able to support the demands placed upon it. In addition, the Internet
9
<PAGE>
could lose its viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Changes in or
insufficient availability of telecommunications services to support the
Internet also could result in slower response times and adversely affect usage
of the Internet generally and RoweCom's services in particular. If the
infrastructure for the Internet does not effectively support growth that may
occur, our future financial results will be materially adversely affected. Even
if the required Internet infrastructure, standards and protocols are developed,
we may be required to incur substantial expenditures in order to adapt our
services to changing or emerging technologies, which could have a material
adverse effect on our future results of operations and financial condition.
Potential imposition of government regulation on e-commerce and legal
uncertainties could limit our growth.
Few laws or regulations currently are directly applicable to access to or
commerce on the Internet and we are not subject to direct government
regulation, other than regulations applicable to businesses generally. The
adoption of new laws or the adaptation of existing laws to the Internet may
decrease the growth in the use of the Internet, which could in turn decrease
the demand for our services, increase the cost of our doing business or
otherwise have a material adverse effect on our future results of operations
and financial condition. A number of legislative and regulatory proposals
relating to Internet commerce are under consideration by federal, state, local
and foreign governments and, as a result, a number of laws or regulations may
be adopted with respect to Internet user privacy, taxation, pricing, quality of
products and services and intellectual property ownership. There is also
uncertainty as to how existing laws will be applied to the Internet in areas
such as property ownership, copyright, trademark, trade secret, obscenity and
defamation.
The imposition of possible sales tax and other tax obligations on e-commerce
could limit our growth.
We do not collect sales or other similar taxes when we sell books and
subscriptions. If one or more states or any foreign country were to require
that we collect sales or other taxes on the sale of books and subscriptions
through our system, it could have a material adverse effect on our future
financial results.
A number of proposals have been made at the state and local level that would
impose taxes on the sale of goods and services through the Internet. Such
proposals, if adopted, could substantially impair the growth of e-commerce and
could adversely affect our future results of operation and financial condition.
A law imposing a three-year moratorium on new taxes on Internet-based
transactions has recently been enacted in the US. This moratorium relates to
new taxes on Internet access fees and state taxes on e-commerce that
discriminate against out-of-state Web sites. Sales or use taxes imposed by
those buying or selling products or services over the Internet will not be
affected by this moratorium. We have not yet been able to determine how we will
be affected by this moratorium. To the extent that the moratorium provides a
material benefit, its expiration after three years could have a material
adverse effect on our financial condition and results of operations.
Possible e-commerce security breaches could harm our business.
We rely on encryption and authentication technology to effect secure
transmission of confidential information, such as payment instruction sets. It
is possible that advances in computer capabilities, new discoveries in the
field of cryptography, or other events or developments will result in a
compromise or breach of the codes used by us to protect client transaction
data. If any such compromise of our security were to occur, it could have a
material adverse effect on our reputation and future results of operations and
financial condition, and expose us to a risk of loss or litigation and possible
liability. It is possible that our security measures will not prevent security
breaches.
Possible infringement of intellectual property rights could harm our business.
Legal standards relating to the protection of intellectual property rights in
Internet-related industries are uncertain and still evolving. As a result, the
future viability or value of our intellectual property rights, as well as those
of other companies in the Internet industry, is unknown. We cannot be certain
that the steps we have taken to protect our intellectual property rights will be
adequate or that third parties will not infringe or
10
<PAGE>
misappropriate our proprietary rights. Any such infringement or
misappropriation could have a material adverse effect on our future financial
results. In addition, we cannot be certain that our business activities will
not infringe upon the proprietary rights of others, or that other parties will
not assert infringement claims against us.
Risks Relating to the Offering
After the offering, we will continue to be controlled by existing stockholders.
Upon completion of this offering, the principal stockholders listed under
"Principal Stockholders" will beneficially own approximately 53.97% of our
outstanding common stock, and 51.50% if the underwriters' over-allotment option
is exercised in full. Consequently, such persons, as a group, will be able to
control the outcome of all matters submitted for stockholder action, including
the election of members to our board of directors and the approval of
significant change-in-control transactions. Therefore, they will effectively
control our management and affairs. This may have the effect of delaying or
preventing a change in control. See "Management" and "Principal Stockholders."
We will not pay dividends for the foreseeable future.
We anticipate that earnings, if any, will be retained for the development of
our business and that no cash dividends will be declared on the common stock
for the foreseeable future. RoweCom's loan agreement with Imperial Bank also
prohibits the payment of dividends. See "Dividend Policy."
There will be immediate and substantial dilution to new investors in this
offering.
The initial public offering price is substantially higher than the net tangible
book value per share of the outstanding common stock will be immediately after
the offering. Any common stock you purchase in the offering will have a post-
offering net tangible book value per share of $7.55 less than the price you
paid for the share, assuming an initial public offering price of $13 per share,
the mid-point of the range set forth on the cover page of this prospectus. See
"Dilution."
Our stock price may decline after the offering and may be volatile in the
future.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations
between the underwriters and us, and may not be indicative of our future market
prices. As a result, you may not be able to resell any shares you buy from us
at or above the initial public offering price due to a number of factors,
including:
. actual or anticipated fluctuations in our operating results;
. changes in expectations as to our future financial performance or
changes in financial estimates of securities analysts;
. announcement of new products or product enhancements by us or our
competitors;
. technological innovations by us or our competitors; and
. the operating and stock price performance of other comparable companies.
In addition, the stock market in general has experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect
the trading price of our common stock, regardless of our actual operating
performance. In particular, the stock prices for many companies in the
technology and emerging growth sectors have experienced wide fluctuations which
have often been unrelated to the operating performance of such companies. Such
fluctuations may adversely affect the market price of the common stock.
You should read the "Underwriting" section for a more complete discussion of
the factors to be considered in determining the initial public offering price.
Sales of outstanding common stock may depress the stock price after the
offering.
A substantial number of shares of our common stock could be sold into the
public market after this offering. The occurrence of such sales, or the
perception that such sales could occur, could materially and adversely affect
our stock price or could impair our ability to obtain capital through an
offering of equity securities. After
11
<PAGE>
this offering, we will have outstanding 9,630,416 shares of common stock, or
10,095,416 shares if the underwriters exercise their option to purchase
additional shares of common stock in the offering. We have also reserved an
additional 2,018,687 shares of common stock for issuance under our stock option
and stock purchase plans and under other stock option agreements. Options to
purchase 602,966 of these shares have been issued, of which 163,584 will be
exercisable upon the consummation of this offering.
The 3,100,000 shares of common stock being sold in this offering will be freely
transferable under the securities laws immediately after issuance, except for
any shares sold to "affiliates" of RoweCom. We intend to register for resale
the shares of common stock reserved for issuance under our stock option and
stock purchase plans approximately 180 days after the date of this prospectus.
In addition, certain stockholders have agreed under written "lock-up"
agreements that, for a period of 180 days from the date of this prospectus,
they will not sell their shares. As a result, upon the expiration of the lock-
up agreements 180 days after the date of this prospectus, 4,901,315 shares of
common stock will be eligible for sale subject, in most cases, to certain
volume and other restrictions under the Federal securities laws. The remaining
1,629,101 shares of common stock will become eligible for resale under the
Federal securities laws on the first anniversary of their respective dates of
issuance, beginning on December 11, 1999. See "Management--Stock Incentive
Plans" and "Shares Eligible for Future Sale."
We and shareholders who will hold in the aggregate 5,599,705 shares of common
stock upon the consummation of this offering have entered into a registration
rights agreement which requires us to include shares of common stock held by
such shareholders in registered offerings of common stock made by us in the
future.
12
<PAGE>
Forward-looking Statements
This prospectus contains forward-looking statements based on current
expectations, estimates and projections with respect to RoweCom and our
industry. These statements include:
. forecasts of growth in the business-to-business market for business
information, magazines, newspapers, journals, books and other knowledge
resources, growth in business-to-business e-commerce, and growth in the
number of professional workers relying on knowledge resources;
. statements regarding RoweCom's preparedness for the Year 2000 date
change and trends in RoweCom's sales, expense levels, and liquidity and
capital resources;
. statements relating to potential gross margin growth;
. statements regarding RoweCom's plans for international growth, including
in Canada; and
. other statements, including statements containing words such as
"anticipate," "believe," "plan," "estimate," "expect," "seek," "intend"
and other similar words that signify forward-looking statements.
These forward-looking statements involve risks and uncertainties, both known
and unknown, and actual results may differ materially from those anticipated or
expressed in such statements. Potential risks and uncertainties include those
described in this prospectus under "Risk Factors," which begin on page 4, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which begin on page 19. The forecasts of growth referred to above
are also based on a number of additional assumptions, including that:
. the worldwide economy will resume its expansion;
. the number of people online and the total number of additional hours
spent online will increase significantly over the next three years;
. advances in database technology will stimulate greater demand for
information; and
. spending on electronically delivered information will increase
significantly.
If any one or more of the preceding assumptions turns out to be incorrect, or
one or more of the risks identified in "Risk Factors" occurs, actual growth may
be materially different from that forecasted. Accordingly, there can be no
assurance that the business-to-business market for business information,
magazines, newspapers, journals, books and other knowledge resources, business-
to-business Internet commerce, or the number of professional workers relying on
knowledge resources will grow over the next three years at the rates forecasted
or at all. Lack of growth at the forecasted rates may have a material adverse
impact on our future results of operations and financial condition.
Except as required by law, we undertake no obligation to update any forward-
looking statement, whether as a result of new information, future events or
otherwise.
13
<PAGE>
Use of Proceeds
Assuming an initial public offering price of $13 per share, which is the mid-
point of the range set forth on the cover of this prospectus, RoweCom will
receive approximately $36.7 million from the sale of common stock in this
offering, or $42.3 million if the underwriters' over-allotment option is
exercised in full. These amounts are net of estimated underwriting discounts
and commissions, and estimated offering expenses of $800,000 payable by
RoweCom.
The principal purposes of this offering are to:
. finance the expansion of RoweCom's business and to increase available
working capital;
. create a public market for the common stock;
. facilitate future access by RoweCom to public equity markets; and
. increase the visibility of RoweCom in the marketplace.
RoweCom currently intends to use:
. about 30-60% of the net proceeds of this offering to increase sales and
marketing efforts; and
. about 20-30% of the net proceeds of this offering to develop increased
functionality for the kStore, increase content available through the
kStore by increasing our content acquisition staff, and enhance our
technical infrastructure, including by developing redundant systems.
We intend to use the balance of the net proceeds of the offering for working
capital and general corporate purposes, including making capital expenditures
in the ordinary course of our business. We may also apply a portion of the net
proceeds of the offering to acquire businesses, products and technologies that
are complementary to ours. Although we have not identified any specific
businesses, products or technologies that we may acquire and have not entered
into any current agreements or negotiations with respect to any such
transactions, we evaluate such opportunities from time to time. Pending such
uses, the net proceeds will be invested in government securities and other
short-term, investment-grade, interest-bearing instruments.
Dividend Policy
RoweCom has never declared or paid any cash dividends on its capital stock and
does not intend to pay any cash dividends on its common stock for the
foreseeable future. Future dividends, if any, will be determined by the board
of directors. Under our loan agreement with Imperial Bank, we are prohibited
from paying dividends while the loan agreement is in effect.
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<PAGE>
Capitalization
The following table sets forth the capitalization of RoweCom as of December 31,
1998 on an actual basis, and on a pro forma as adjusted basis after giving
effect to:
. The exchange of 1,611,568 shares of the Class A Preferred Stock and
1,186,240 shares of the Class B Preferred Stock of RoweCom's subsidiary,
Rowe Communications Ltd. ("RoweCom Canada") into 3,163,306 shares of
Class A-1 Preferred Stock of RoweCom and 1,186,240 shares of Class B
Preferred Stock of RoweCom, respectively;
. The conversion of 161,289 shares of Class A Preferred Stock, 3,163,306
shares of Class A-1 Preferred Stock, 6,326,610 shares of Class B
Preferred Stock and 4,586,599 shares of Class C Preferred Stock of
RoweCom into an aggregate of 4,969,705 shares of common stock;
. The exercise or net exercise of all outstanding stock purchase warrants
for 34,531 shares of common stock; and
. the sale by RoweCom of 3,100,000 shares of common stock in this offering
at an assumed initial public offering price of $13 per share, the mid-
point of the range set forth on the cover page of this prospectus, after
deducting estimated underwriting discounts and commissions, and
estimated offering expenses of $800,000 payable by RoweCom.
The pro forma, as adjusted amounts included in the table below do not include
602,966 shares of common stock issuable upon the exercise of options
outstanding on the date of this prospectus at a weighted average exercise price
of $3.21 per share, and 1,415,721 additional shares of common stock reserved
for issuance under RoweCom's stock option and stock purchase plans.
This information should be read in conjunction with RoweCom's consolidated
financial statements and related notes appearing elsewhere in this prospectus,
as well as the information appearing under "Transactions Among Related Parties"
and "Management--Stock Incentive Plans."
<TABLE>
<CAPTION>
---------------------------
As of December 31, 1998
---------------------------
Pro Forma
Actual as adjusted(3)
----------- --------------
<S> <C> <C>
Dollars in thousands, except per share data
Redeemable Convertible Preferred Stock:
Class A Preferred Stock, $.01 par value per
share; 1,772,857 shares issued and
outstanding; 0 shares issued and outstanding,
as adjusted(1)................................ $ 4,637 --
Class B Preferred Stock, $.01 par value per
share; 6,326,610 shares issued and
outstanding; 0 shares issued and outstanding,
as adjusted(2)................................ 8,198 --
Class C Preferred Stock, $.01 par value per
share, 4,586,599 shares issued and
outstanding; 0 shares issued and outstanding,
as adjusted................................... 15,588 --
----------- -----------
Total........................................ 28,423 --
Stockholders' equity:
Common Stock, $.01 par value per share;
34,000,000 shares authorized; 1,526,180 shares
issued and outstanding; 9,630,416 shares
issued and outstanding, as adjusted........... 15 $ 96
Additional paid-in capital..................... 1,710 66,931
Treasury stock, at cost........................ (53) (53)
Accumulated deficit............................ (13,901) (13,901)
Cumulative translation adjustment.............. (22) (22)
----------- -----------
Total stockholders' (deficit) equity......... (12,251) 53,051
----------- -----------
Total capitalization......................... $ 16,172 $ 53,051
=========== ===========
</TABLE>
- --------
(1)Includes 161,289 shares of Class A Preferred Stock of RoweCom and 1,611,568
shares of Class A Preferred Stock of RoweCom Canada. See note 12 to the
consolidated financial statements.
(2)Includes 5,140,370 shares of Class B Preferred Stock of RoweCom and
1,186,240 shares of Class B Preferred Stock of RoweCom Canada. See note 12 to
the consolidated financial statements.
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<PAGE>
Dilution
The pro forma net tangible book value of RoweCom as of December 31, 1998 was
$15,764,754, or $2.41 per share of common stock after giving effect to the
conversion of all outstanding shares of preferred stock into common stock, and
the exercise of all outstanding stock purchase warrants. Pro forma net tangible
book value per share is determined by dividing the net tangible book value of
RoweCom (total tangible assets less total liabilities) by the total number of
shares of common stock outstanding after giving effect to the transactions
described in the previous sentence. After giving effect to the sale of the
3,100,000 shares of common stock offered by RoweCom hereby at an assumed
initial public offering price of $13 per share, the mid-point of the range set
forth on the cover of this prospectus, and after deducting estimated
underwriting discounts and commissions and offering expenses payable by
RoweCom, which would result in estimated net proceeds of $36,679,000, the
adjusted pro forma net tangible book value of RoweCom as of December 31, 1998,
would have been $52,443,754 or $5.45 per share. This represents an immediate
increase in the pro forma net tangible book value of $3.04 per share to
existing stockholders and an immediate dilution of $7.55 per share to new
investors. The following table illustrates the per share dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share........................ $13.00
Pro forma net tangible book value per share before this offering(1).... $ 2.41
Increase attributable to new investors(1).............................. $ 3.04
Adjusted pro forma net tangible book value per share after this
offering.............................................................. $ 5.45
Dilution per share to new investors.................................... $ 7.55
</TABLE>
- --------
(1)Assumes no exercise of the underwriters' over-allotment option and no
exercise of stock options outstanding as of December 31, 1998. As of the date
of this prospectus, options to purchase 602,966 shares of common stock were
outstanding at a weighted average exercise price of $3.21 per share, and
1,415,721 shares were available for the issuance of additional stock options
under RoweCom's stock option and stock purchase plans. To the extent that any
of these options are exercised, there will be further dilution to new
investors. If all of these outstanding options were exercised in full, the
dilution per share to new investors in this offering would be increased by $.32
per share to a total of $7.87 per share, and the average price per share paid
by RoweCom's existing shareholders would be $4.20. See "Capitalization,"
"Management--Stock Incentive Plans," "Transactions Among Related Parties" and
note 14 to the consolidated financial statements.
The following table summarizes on a pro forma basis, as of December 31, 1998,
the difference between the number of shares of common stock purchased from
RoweCom, the total consideration paid to RoweCom and the average price per
share paid by the existing stockholders and by the new investors, assuming an
initial public offering price of $13 per share, the mid-point of the range set
forth on the cover of this prospectus, before deduction of estimated
underwriting discounts and commissions and offering expenses:
<TABLE>
<CAPTION>
---------------------------------------------------
Shares Purchased Total Consideration
----------------- ------------------- Average Price
Number Percent Amount Percent Per Share
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)... 6,530,416 68% $29,950,402 43% $ 4.59
New investors(2)........... 3,100,000 32% 40,300,000 57% 13.00
--------- --- ----------- ----
Total...................... 9,630,416 100% $70,250,402 100%
</TABLE>
- --------
(1) Assumes the conversion of all outstanding shares of preferred stock into
common stock and the exercise of all outstanding stock purchase warrants, as if
each had occurred on December 31, 1998.
(2) See note 1 to the preceding table.
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<PAGE>
Selected Financial Information
The following historical selected consolidated financial information of RoweCom
is qualified by reference to and should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
prospectus.
The statement of operations data set forth below for each of the fiscal years
ended December 31, 1997 and 1998 and the balance sheet data at December 31,
1997 and 1998 are derived from consolidated financial statements of RoweCom
audited by PricewaterhouseCoopers LLP, independent accountants, which are
included elsewhere in this prospectus. The statement of operations data set
forth below for the fiscal year ended December 31, 1995, and the balance sheet
data at December 31, 1995 and 1996 are derived from audited financial
statements of RoweCom not included in this prospectus.
The selected consolidated financial data for the period from inception (January
1, 1994) through December 31, 1994 and at December 31, 1994 are derived from
unaudited consolidated financial statements of RoweCom not included in this
prospectus. The unaudited consolidated financial statements include all
adjustments, comprised only of normal recurring entries, which we consider
necessary for a fair presentation.
<TABLE>
<CAPTION>
--------------------------------------------------
Year Ended December 31,
--------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Dollars in thousands,
except per share data
Statement of Operations
Data:
Revenues.................. -- $ 324 $ 3,116 $ 12,890 $ 19,053
Cost of revenues.......... -- 323 3,083 12,701 18,736
-------- -------- -------- -------- ----------
Gross profit.......... -- 1 33 189 317
Operating expenses:
Sales and marketing...... $ 9 259 585 2,035 4,817
Research and
development............. 19 149 532 584 1,631
General and
administrative.......... 7 171 351 751 1,561
-------- -------- -------- -------- ----------
Total operating
expenses............... 35 579 1,468 3,370 8,009
-------- -------- -------- -------- ----------
Loss from operations.. (35) (578) (1,435) (3,181) (7,692)
Interest and other income,
net...................... (3) 1 1 64 172
-------- -------- -------- -------- ----------
Loss before income
taxes................ (38) (577) (1,434) (3,117) (7,520)
Provision for income
taxes.................... -- 8 16 137 109
-------- -------- -------- -------- ----------
Net loss.............. $ (38) $ (585) $ (1,450) $ (3,254) $ (7,629)
======== ======== ======== ======== ==========
Basic and diluted pro
forma net loss per
share(1)................. -- -- -- -- $ (1.87)
Shares used in pro forma
net loss per share
calculation(1)........... 4,077,075
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------
At December 31, At December 31, 1998
------------------------- ------------------------
Pro Forma
1994 1995 1996 1997 Actual as adjusted(2)
---- ---- ----- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Dollars in thousands
Consolidated Balance Sheet
Data:
Working capital........... $ 1 $(49) $(481) $ 185 $ 15,447 $52,326
Total assets.............. 15 204 428 2,108 20,284 57,163
Redeemable preferred
stock.................... -- -- -- 4,298 28,423 --
Total stockholders' equity
(deficit)................ 12 52 (338) (3,768) (12,251) 53,051
</TABLE>
<TABLE>
<CAPTION>
--------------------------
Year ended December 31,
--------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Supplemental Information
Average number of transactions per client(3)....... 151 234 257
Average gross revenue in dollars per transaction(3)
.................................................. $ 456 $ 390 $ 396
Number of clients.................................. 45 141 187
</TABLE>
- --------
(1)Pro forma per share amounts are calculated by using the sum of (A) the
weighted average number of shares of common stock outstanding during the period
and (B) the weighted average number of shares of common stock issuable upon the
conversion of shares of RoweCom's preferred stock outstanding during the period
and the exercise of all outstanding stock purchase warrants. See "Transactions
Among Related Parties" and "Principal Stockholders."
17
<PAGE>
(2)Reflects the issuance of 5,004,236 shares of common stock as of the closing
of this offering upon the conversion of all shares of RoweCom's preferred stock
outstanding at that date and the exercise of all outstanding stock purchase
warrants. See "Transactions Among Related Parties" and "Principal
Stockholders". Also reflects the sale by RoweCom of 3,100,000 shares of common
stock at an assumed initial public offering price of $13 per share, the mid-
point of the range set forth on the cover page of this prospectus, after
deducting estimated underwriting discounts and commissions, and estimated
offering expenses of $800,000 payable by RoweCom. Excludes (A) 602,966 shares
of common stock issuable upon the exercise of options outstanding on the date
of this prospectus at a weighted average exercise price of $3.21 per share and
(B) 1,415,721 additional shares of common stock reserved for issuance under
RoweCom's stock option and stock purchase plans.
(3)A transaction is a single item purchased by a client, such as a single
subscription or book.
18
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and related notes thereto included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. RoweCom's actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those set forth under "Risk Factors"
and elsewhere in this prospectus.
Overview of RoweCom's Operations and Financial Performance
RoweCom provides businesses and their employees with an e-commerce solution for
purchasing and managing the acquisition of magazines, newspapers, journals,
books and other knowledge resources through a corporate intranet or the
Internet. We offer our clients access to the largest catalog of magazines,
newspapers, journals, books and other knowledge resources on the Internet.
RoweCom allows employees to purchase knowledge resources easily and
conveniently from their desktop computers and provides businesses with a highly
effective means of managing and controlling purchases of knowledge resources
and reducing costs. Our target clients are in knowledge-intense industries,
such as financial and professional services, high technology and healthcare as
well as selected academic and non-profit institutions.
RoweCom began significant commercial operations in March 1996. We introduced
our flagship product, the kStore(TM), in June 1997. Since its inception,
RoweCom has incurred significant net losses and, as of December 31, 1998, had
an accumulated deficit on a consolidated basis of $13.9 million.
Substantially all of our revenues are generated by the sale of magazines,
newspapers, journals, books and other knowledge resources published by third
parties. The sales price of each knowledge resource during the reported periods
reflected the cost to RoweCom of the knowledge resource plus a transaction fee
retained by us. This pricing structure changed in the fourth quarter of 1998.
See "--RoweCom Gross Margin" on page 20. RoweCom received a flat fee or, in
some cases, a percentage of the selling price for each item purchased through
the kStore. While RoweCom receives orders and payments directly from its
clients, and processes such orders and payments on behalf of such clients, it
does not maintain an inventory of any of the knowledge resources it sells.
Accordingly, RoweCom does not incur inventory costs and is not subject to
inventory risk. Approximately 46.5% of our revenues for 1998 were generated
from the renewal of subscriptions. We believe that we will continue to receive
a substantial portion of revenue in the future from renewals. RoweCom, in some
cases, finances the knowledge resource purchases of its clients, principally
through borrowings under its credit facility, and at December 31, 1998 had
outstanding accounts receivable of $2.0 million.
RoweCom's services initially focused on academic libraries and centralized
purchasing groups. Beginning in 1998, we have increasingly focused our sales
and marketing efforts on corporate clients and on desktop purchases by
individuals rather than centralized purchasing groups. We believe that an
increase in the number of desktop purchasers at a client will increase the
amount of revenue generated by such client. As a result of our efforts,
purchases by corporate clients in 1998 have increased more rapidly than
purchases by academic and public institution clients. Sales to corporate
clients grew to approximately $12.6 million in 1998 from approximately $7.2
million in 1997.
To date, a substantial majority of our revenues have been generated in the
fourth quarter of each year, primarily because most subscriptions are purchased
or renewed in that quarter, with subscriptions generally beginning on January
1st. As purchases by individual employees increase as a percentage of total
revenues, the seasonality described above has begun to decrease because desktop
purchases are generally made as required, and thus are more evenly distributed
throughout the year. For a more detailed discussion of the seasonality of our
business, see "--Selected Quarterly Results of Operations."
Substantially all of RoweCom's expenses consist of the cost of the knowledge
resources sold to its clients, which are variable, and sales and marketing,
research and development and general and administrative expenses, which are
relatively fixed. RoweCom's fixed expense levels have increased over time as
its operations have expanded and are expected to continue to increase over the
near and medium term. Management expects that expenses will increase primarily
in sales and marketing as RoweCom increases its direct sales force and support
staff, and in research and development, as RoweCom develops new technology to
19
<PAGE>
enhance its service. Sales and operating results generally depend on the volume
and timing of orders received, which are difficult to forecast. As a result,
RoweCom may be unable to adjust fixed expense spending in a timely manner to
compensate for any unexpected fluctuation or shortfall in revenue or gross
profit. Any significant shortfall in gross profit in relation to RoweCom's
fixed expenses would have an immediate adverse effect on RoweCom's results of
operations.
In the third and fourth quarters of 1998, RoweCom entered into strategic
alliances with barnesandnoble.com llc and NewSub Services, Inc., each of which
added substantial new content to our catalog as well as new distribution
channels for our services. barnesandnoble.com will pay RoweCom a fixed
percentage of the purchase price of every book sold either through RoweCom's
kStore or barnesandnoble.com's Business Solutions service, other than sales to
existing clients of the Business Solutions service as of the date of the
agreement. RoweCom will pay barnesandnoble.com a fixed amount or percentage of
the purchase price of every subscription sold by RoweCom's kStore or
barnesandnoble.com's Business Solutions service, other than sales to existing
RoweCom customers as of the date of the agreement. Under the terms of the
agreement with NewSub Services, each party will earn revenue on titles sold
through the other party's online distribution channel by receiving a percentage
of the gross sales price or a transaction fee for each of its respective titles
sold by the other party. These strategic alliances are not expected to generate
material revenues until the second half of 1999. RoweCom has entered into other
strategic relationships and intends to continue to enter into strategic
relationships that will further increase content and add new distribution
channels. RoweCom expects that the terms of most strategic alliances will
include some element of revenue sharing between the parties. See "Business--
Strategic Alliances."
RoweCom's Gross Margin
RoweCom's gross margin has increased in each of the past three years from 1.08%
in 1996 to 1.66% in 1998. The gross margin reflects:
. the mix of products purchased by our clients;
. the discount rates we are able to obtain from publishers;
. our pricing structure; and
. the amount of installation fees we earn as a proportion of total
revenues.
We are seeking to increase RoweCom's gross margin by:
. revising our pricing structure;
. increasing sales of higher margin products;
. obtaining greater discounts from publishers; and
. increasing installation fees.
We believe that the combined effect of these strategies, which are discussed in
greater detail below, will be to improve our gross margin. However, we cannot
be certain that these strategies will be successful or of the timing or extent
of any improvement.
Pricing. RoweCom generally purchases publications from publishers at a discount
from the list price. These discounts vary widely from an average of 5% on high-
priced scientific, technical and medical publications, whose average selling
price is hundreds of dollars, to 80% for lower-priced general interest and
large circulation magazines, whose average selling price is below $30. Until
the fourth quarter of 1998, RoweCom's pricing strategy had been to pass the
discount provided by the publisher on to the buyer and retain only a flat fee
for each subscription sold. This aggressive pricing strategy was aimed at
gaining market share quickly and establishing the RoweCom brand, but led to low
gross margins.
In the fourth quarter of 1998, RoweCom began offering approximately 800 large
circulation and general interest publications under its alliance with NewSub
Services. RoweCom earns a 35% margin on initial orders and a 15% margin on
renewals of these publications. RoweCom plans to aggressively promote these
publications in 1999 in order to seek to improve gross margin overall.
In the first quarter of 1999, RoweCom began retaining a portion of the
discounts it obtains from publishers on serials instead of passing such
discounts on to customers, as it had done in the past. Nonetheless, RoweCom
20
<PAGE>
offers its large volume customers the guaranteed lowest price on the market for
all subscriptions. RoweCom expects that this change in pricing will benefit
RoweCom's gross margin, although no assurances can be given that this strategy
will be successful.
Product Mix. RoweCom believes that its increased focus on corporate desktop
purchases will result in increased sales of lower-priced items on which RoweCom
retains a higher percentage of the sales price. Corporate libraries and central
purchasing groups generally purchase higher-priced business and trade,
scientific, technical and medical publications, while desktop purchases tend to
be lower-priced business and trade, and general interest and large circulation
publications. RoweCom's kStore is specifically designed to allow decentralized
desktop purchases with centralized approval and reporting. This feature,
combined with favorable pricing on lower-priced items and books, should
increase sales of lower priced knowledge resources. Our increased focus on
desktop sales may result in higher gross margins, but there can be no assurance
that RoweCom's trend of increasing desktop purchases will continue or that, if
continued, the trend will produce increased gross margin.
Greater Discounts. We believe that the increasing volume of sales by RoweCom
will increase the buying power of RoweCom and possibly allow us to negotiate
higher discounts from publishers on the items we resell. This will provide the
opportunity for higher gross margins and improved pricing. We cannot be
certain, however, that our sales volumes will continue to increase or that we
will be able to obtain greater discounts.
Increasing Installation Fees. Prior to 1999, we frequently waived the
installation fee charged when a new customer's store was set up. Since 1999, it
has been RoweCom's policy to collect these fees and we believe that this change
in policy will have a positive effect on gross margin, although we cannot be
certain of the success of this strategy.
Results of Operations
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Revenues. Revenues consist almost entirely of the sales of knowledge resources.
Revenues increased to $19.1 million in 1998 as compared to $12.9 million in
1997, an increase of $6.2 million, or 47.8%. This increase resulted primarily
from increased sales per client and growth in our client base, particularly in
the corporate sector. Average revenues generated per client increased to
approximately $102,000 in 1998 from approximately $91,000 in 1997. During 1998,
187 of our clients placed orders, an increase of 33.0% over the 141 clients
that placed orders during 1997. A substantial majority of these new clients
were corporate clients. Revenues earned on sales to existing clients increased
by $3.0 million, or 23.0%, to $15.9 million in 1998 from $12.9 million in 1997.
Cost of Revenues. Cost of revenues consists almost entirely of the cost of
acquiring the knowledge resources sold to clients. Cost of revenues in 1998 was
$18.7 million as compared to $12.7 million during 1997, an increase of $6.0
million or 47.5%. This increase was due to the increase in sales discussed
above. Cost of revenues as a percentage of revenues decreased to 98.3% in 1998
as compared to 98.5% in 1997. This was primarily due to an increase in
installation revenues from $4,000 in 1997 to $41,000 in 1998.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and commissions paid to RoweCom's direct sales force, account managers and
client service representatives, travel expenses, and expenses relating to
marketing materials and fulfillment activities. Sales and marketing expenses
increased to $4.8 million during 1998 from $2.0 million during 1997, an
increase of $2.8 million or 136.8%. This growth principally reflected a $1.9
million increase in salary and hiring expenses and a $381,000 increase in sales
force expenses, including travel, office space, and telephone. The increase in
salary expense resulted from an increase in the average headcount of our direct
sales force, account managers and client service representatives during 1998 as
compared to 1997. RoweCom intends to significantly increase its direct sales
force in 1999, as well as hire additional account managers and client service
representatives.
Research and Development. Research and development expenses consist principally
of compensation and related expenses, including consulting fees, and other
expenses relating to the development and maintenance of our service and
production systems. Research and development expenses increased to $1.6 million
in 1998 from $584,000 in 1997, an increase of $1.0 million or 179.3%, primarily
as a result of increased staffing and
21
<PAGE>
associated costs incurred in an effort to integrate new content into our
catalog, to enhance the user interface and functionality of the kStore and to
develop the transaction processing systems. Consulting fees in connection with
improvements in the content of the catalog, user interface and functionality of
the kStore and transaction processing system increased 258.1% from $105,000 in
1997 to $376,000 in 1998.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for RoweCom's executive,
administrative, finance and human resources departments as well as professional
service fees. General and administrative expenses increased to $1.6 million in
1998 from $751,000 in 1997, an increase of $810,000 or 107.8%, principally
reflecting a $461,000 increase in salary and hiring expenses. This increase was
mainly due to growth in average headcount in the executive, administrative,
finance and human resources departments.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Revenues. Revenues increased to $12.9 million in 1997, as compared to $3.1
million in 1996, an increase of $9.8 million, or 313.6%. This increase resulted
primarily from the significant growth in RoweCom's client base, particularly in
the academic sector. During 1997, 141 of our clients placed orders, an increase
of 207.0% over the 45 clients that placed orders during 1996. Revenues earned
on sales to existing clients also increased by $1.7 million, or 55.0%, to $4.8
million in 1997 from $3.1 million in 1996, and average revenues generated per
client increased to approximately $91,000 in 1997 from approximately $69,000 in
1996.
Cost of Revenues. Cost of revenues in 1997 was $12.7 million as compared to
$3.1 million during 1996, an increase of $9.6 million or 312.0%. This increase
was due to the significant increase in sales discussed above. Cost of revenues
as a percentage of revenues was 98.5% in 1997 as compared to 98.9% in 1996.
This improvement was principally the result of an increase in the proportion of
titles sold for which RoweCom retains a higher percentage of the purchase
price.
Sales and Marketing. Sales and marketing expenses increased to $2.0 million
during 1997 from $585,000 during 1996, an increase of $1.4 million, or 248.0%.
This growth principally reflected an increase in salary and related expenses
and, to a lesser extent, increased advertising expenses. The increase in salary
and related expenses resulted from an increase in commissions paid to RoweCom's
direct sales force as a consequence of higher sales and an increase in the
average headcount of our direct sales force, account managers and client
service representatives in 1997 as compared to 1996.
Research and Development. Research and development expenses increased to
$584,000 in 1997 from $532,000 in 1996, an increase of $52,000 or 9.7%,
primarily as a result of increased staffing and associated costs relating to
efforts to develop and launch the kStore.
General and Administrative Expenses. General and administrative expenses
increased to $751,000 in 1997 from $351,000 in 1996, an increase of $400,000 or
113.8%, primarily due to increases in average headcount in the executive,
administrative, and finance departments.
22
<PAGE>
Selected Quarterly Results of Operations
The following table presents unaudited quarterly consolidated statement of
operations data for each of the four quarters during the years ended December
31, 1997 and 1998. In management's opinion, this information has been prepared
substantially on the same basis as the audited consolidated financial
statements appearing elsewhere in this prospectus, and all necessary
adjustments, consisting only of normal recurring adjustments, have been
included in the amounts stated below to present fairly the unaudited quarterly
results. The quarterly data should be read in conjunction with the audited
consolidated financial statements of RoweCom and the notes thereto appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Three Months Ended
------------------------------------------------------------------------
1997 1998
---------------------------------- ------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- ------- -------- ------- -------- -------
Dollars in thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 621 $ 80 $ 240 $11,949 $ 1,307 $ 865 $ 1,413 $15,468
Cost of revenues........ 607 79 233 11,782 1,284 819 1,391 15,242
----- ----- ------- ------- ------- ------- ------- -------
Gross profit......... 14 1 7 167 23 46 22 226
Operating expenses:
Sales and marketing.... 221 647 706 461 607 1,311 1,425 1,474
Research and
development........... 80 44 275 185 209 261 279 882
General and
administrative........ 229 198 241 83 288 310 382 581
----- ----- ------- ------- ------- ------- ------- -------
Total operating
expenses 530 889 1,222 729 1,104 1,882 2,086 2,937
----- ----- ------- ------- ------- ------- ------- -------
Loss from
operations.......... (516) (888) (1,215) (562) (1,081) (1,836) (2,064) (2,711)
Interest and other
income, net............ 5 17 33 9 28 18 58 68
----- ----- ------- ------- ------- ------- ------- -------
Loss before income
taxes............... (511) (871) (1,182) (553) (1,053) (1,818) (2,006) (2,643)
Provision for income
taxes.................. 34 34 34 35 28 28 31 22
----- ----- ------- ------- ------- ------- ------- -------
Net loss............. $(545) $(905) $(1,216) $ (588) $(1,081) $(1,846) $(2,037) $(2,665)
===== ===== ======= ======= ======= ======= ======= =======
</TABLE>
To date, a substantial majority of our revenues have been generated in the
fourth quarter of each year, primarily because most subscriptions are purchased
or renewed in that quarter, with subscriptions generally beginning on January
1st. In addition, the libraries and centralized purchasing groups to which we
initially targeted our services have tended to concentrate their purchases at
the end of each year. As purchases by individual employees increase as a
percentage of total revenues, the seasonality described above has begun to
decrease because desktop purchases are generally made as required, and thus are
more evenly distributed throughout the year. We have also recently added
approximately five million books to our catalog as a result of our strategic
alliance with barnesandnoble.com. As book sales become a larger portion of
total revenues, we believe that our revenues will become less seasonal because
books are typically purchased throughout the year, in contrast to
subscriptions, which generally come up for renewal in the fourth quarter of
each year.
Liquidity and Capital Resources
Net cash used in operating activities was $9.0 million in 1998 as compared to
$2.9 million in 1997 and $1.2 million in 1996. Cash used in operating
activities for 1998 resulted primarily from a net loss of $7.6 million and an
increase in accounts receivable of $1.7 million as well as an increase in other
current assets of $372,000 and a decrease in income taxes payable of $121,000.
This was partially offset by an increase in accounts payable, accrued expenses
and accrued compensation of $684,000. Cash used in operating activities in 1997
was primarily attributable to a net loss of $3.3 million and an increase in
accounts receivable and other current assets of $387,000. This was partially
offset by an increase in accrued expenses and accrued compensation of $479,000,
as well as an increase in income taxes payable of $126,000.
Net cash used in investing activities in 1998 was $597,000, substantially all
of which was used to purchase fixed assets, as compared to $229,000 in 1997 and
$91,000 in 1996.
Since its inception, RoweCom has financed its operations primarily through
sales of its equity securities in private placements. Net cash provided by
financing activities in 1998 was $25.0 million, primarily resulting from the
sale of shares of RoweCom's Class B Convertible Preferred Stock and Class C
Convertible Preferred
23
<PAGE>
Stock, and RoweCom Canada's Class B Preferred Stock. Net cash provided by
financing activities in 1997 was $3.8 million, primarily as the result of the
sale of shares of RoweCom Canada's Class A Preferred Stock. Net cash provided
by financing activities was $1.3 million in 1996, primarily as the result of
capital contributions by RoweCom's founder. All outstanding preferred stock of
RoweCom Canada will be exchanged for preferred stock of RoweCom immediately
prior to the completion of this offering, and all of the outstanding preferred
stock of RoweCom, including the shares issued in exchange for the preferred
stock of RoweCom Canada, will convert to common stock upon completion of this
offering. See "Transactions Among Related Parties."
In September 1998, RoweCom entered into an amendment of its loan agreement with
Imperial Bank which provided us with a revolving line of credit of up to
$4,000,000 in addition to the existing term loan of approximately $320,000.
RoweCom uses borrowings under this line of credit to finance its accounts
receivable. Borrowing requests under this facility are conditioned upon the
delivery of a list of eligible accounts receivable, as defined under the
amended loan agreement. As of December 31, 1998, RoweCom had $1,337,000
outstanding under this revolving line of credit. The loan agreement requires
compliance with certain customary financial covenants, such as a "quick ratio,"
defined as current assets divided by current liabilities, of 1.50 as of
December 31, 1998. The loan is collateralized by all of RoweCom's assets,
including accounts receivable and equipment, but excluding intellectual
property. See note 7 to consolidated financial statements.
RoweCom currently believes that cash balances will be sufficient to meet
anticipated cash requirements through the fourth quarter of 1999. We also
believe that the net cash proceeds from this offering, together with cash
balances, will be sufficient to meet currently planned working capital and
capital expenditure requirements through at least 2000. However, there can be
no assurance that additional capital beyond the amounts currently forecasted by
RoweCom will not be required nor that any such required additional capital will
be available on reasonable terms, if at all, at such time as required.
Impact of Possible Share Transfer
Working Ventures Canadian Fund Inc. has agreed to exchange immediately prior to
the consummation of this offering its Class A Preferred Stock and Class B
Preferred Stock of RoweCom Canada into Class A-1 Preferred Stock and Class B
Preferred Stock of RoweCom, respectively. All preferred stock of RoweCom will
be converted to common stock upon the effectiveness of this offering.
Under an agreement among RoweCom's shareholders, in the event that the market
value of Working Ventures' initial investment in shares of Class A Preferred
Stock of RoweCom Canada increases by 45% or more (on an annually compounded
basis) and Working Ventures is not legally restricted from selling such Class A
Preferred Shares, or any common shares into which such preferred shares have
been converted, Working Ventures must transfer an aggregate of 310,371 shares
of common stock to certain other shareholders or optionholders of RoweCom,
substantially all of whom are directors, or former directors, officers and
employees of RoweCom. RoweCom will be required to record a compensation charge
for the period in which these potential transfers occur with respect to the
shares of common stock which are transferred to the RoweCom option and warrant
holders who are eligible to receive such shares as described above. The amount
of this compensation charge will be equal to the aggregate fair market value of
the common stock transferred on the date such stock is transferred to such
option and warrant holders. RoweCom is currently unable to determine whether or
when such a charge will be incurred, or if incurred, the amount of such charge.
See "Transactions Among Related Parties."
Impact of Year 2000 Issue on Operations and Financial Condition of RoweCom
As many computer systems and other equipment with imbedded control chips or
microprocessors use only two digits to represent the year, they may be unable
to process accurately certain data before, during or after the year 2000. The
Year 2000 issue relates to the way that these business systems could fail or
make miscalculations due to interpreting a date including "00" to mean 1900,
not 2000. To the extent that a business system does not fail or make
miscalculations as a result of the Year 2000 date change, such a system is
described as being "Year 2000 Compliant." While RoweCom believes that it has
been taking adequate steps to make sure that its business systems are Year 2000
Compliant, and does not believe that it will incur material costs to prepare
for the Year 2000 date change, achieving complete Year 2000 Compliance is
subject to various risks and uncertainties, and there can be no assurance that
the Year 2000 date change will not lead to failures of such systems that may
have a material adverse effect on RoweCom's future results of operations and
financial condition.
24
<PAGE>
RoweCom has been aware of the possible impact of Year 2000 issues on its
operations since inception and has focused on making its business systems Year
2000 Compliant since that time. Most of this effort has been focused upon
business systems owned or operated by RoweCom or third parties, the failure of
which would directly and adversely affect RoweCom's ability to provide its
services or would otherwise affect revenues or reliability for such a period of
time as to lead to unrecoverable consequences. RoweCom has adopted a Year 2000
compliance program for these critical systems that is designed to:
. assess the readiness of our critical systems to deal with the Year 2000
date change;
. remediate any potential failures through the modification or replacement
of critical systems that may not be Year 2000 Complaint;
. test the existing and improved critical systems for Year 2000 Compliance
prior to the actual Year 2000 date change; and
. develop contingency plans to deal with possible failures by our critical
systems to be Year 2000 Compliant.
At present, approximately 20 employees of RoweCom are working either on a full-
time or part-time basis on Year 2000 Compliance issues and related issues, such
as back-office processing and integration of RoweCom's catalog with its
strategic partners.
RoweCom has focused its Year 2000 Compliance efforts on the following types of
critical systems:
In-house Information Technology
RoweCom has developed a new application that it will use for all client
operations, including order processing and report generation. RoweCom is
currently testing and has begun implementation of this application and is
expecting the application to be fully implemented no later than the third
quarter of 1999. This application, which was designed and developed entirely by
our in-house development staff, was designed to be Year 2000 Compliant.
Accordingly, RoweCom believes that it will not incur any material costs as a
result of any failures by its in-house information technology to be Year 2000
Compliant. RoweCom does not believe that any of its other in-house information
technology systems are critical systems.
Third Party Information Technology
RoweCom believes the only information technology licensed from third parties
that constitutes a Critical System is the Navision accounting software used by
the Company's finance and human resources departments and deployed on a client-
server system. We deployed a new release of this software in the first quarter
of 1998. In its contract with us, Navision represents that its system is Year
2000 Compliant. RoweCom has no reason to believe that this application is not
Year 2000 Compliant.
Third Party Operations
The critical systems maintained by third parties include the Electronic Data
Interchange transaction system, also known in the industry as "EDI," which
carries out RoweCom's transactions with publishers, the CyberCash credit card
transaction processing system that we use to clear credit card purchases, the
Automated Clearing House transaction system, also known in the industry as
"ACH," pursuant to which we clear automatic debit purchases, and the catalog
and purchasing operations maintained by barnesandnoble.com. RoweCom is in the
process of assessing the likelihood that any of these systems will not be Year
2000 Compliant. Toward that end, RoweCom is:
. inquiring about the readiness of such companies' systems for the Year
2000 date change;
. testing, where possible, such systems for Year 2000 Compliance; and
. developing contingency plans for those third party systems that we have
reason to believe may not be Year 2000 Compliant.
While the EDI transaction processing software, which sends order information to
publishers, is Year 2000 Compliant, the publishers' EDI access software may not
receive this data upon the Year 2000 date change or may send data to RoweCom in
a format that is not Year 2000 Compliant. In such an event, RoweCom may
experience material disruption of its operations, including failure to transmit
customers' orders to publishers, failure to receive information from
publishers, and failure to provide adequate customer service. This transaction
system relies on the production systems of a large number of publishers, many
of which may not
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have systems that are Year 2000 Compliant. Because the EDI transaction system
is based upon an industry standard, there are no means currently available by
which RoweCom can remediate possible failures to be Year 2000 Compliant.
RoweCom believes that the credit card transaction processing system it
currently uses is Year 2000 Compliant, based upon tests that it has conducted
using credit card expiration dates with years subsequent to 1999. RoweCom also
believes, based upon representations from Banc One, that the ACH transaction
processing system will be Year 2000 Compliant, although it has not conducted
independent testing of its readiness. In addition, Banc One, as a member of the
Federal Reserve System will be subjected to the stringent Year 2000 readiness
requirements mandated by that system. Accordingly, RoweCom does not have reason
to believe that its ACH transaction processing system will not be Year 2000
Compliant.
RoweCom's clients are currently able to purchase the books included in our
catalog of titles solely through our business partner, barnesandnoble.com.
Users currently may access the barnesandnoble.com and RoweCom catalogs by means
of links found in the Business Solutions and the kStore Web sites. RoweCom and
barnesandnoble.com expect that the Business Solutions and the kStore Web sites
will each contain an integrated catalog of titles by the end of the first
quarter of 1999. In the event that this integrated service is not operational
prior to the Year 2000 date change, a failure by barnesandnoble.com to make all
of its systems Year 2000 Compliant could result in serious difficulties in
processing book orders for the our clients. The Company intends to acquire
certifications from barnesandnoble.com with respect to its Year 2000
Compliance. In addition, RoweCom has also discussed Year 2000 readiness of
NewSub Services and, based upon these discussions, believes that the
proprietary processing system of NewSub is Year 2000 Compliant. However,
RoweCom is also developing an integrated catalog with NewSub Services similar
to the integration with the barnesandnoble.com described above. Failure to
develop an operational service with any partner prior to the Year 2000 date
change may result in an inability to adequately process and fulfill orders from
RoweCom's customers.
RoweCom believes that it has already incurred the majority of the expenses that
it expects to incur to deal with Year 2000 issues. In 1998, we spent
approximately $29,000 on licensing the Navision accounting package. RoweCom
does not believe that it will be required to spend significantly more on third
party information technology. In addition, during 1998 RoweCom incurred
expenses of approximately $541,000 in the development of its internal client
operations application. We anticipate that completing the development and
testing process for the in-house production system will cost an additional
$259,000. Additional costs also may be incurred by the Company in ensuring that
all of its other critical systems are Year 2000 Compliant, particularly with
regard to critical systems operated and maintained by third parties. RoweCom is
currently unable to estimate such costs with any reliability. We have funded
costs incurred to date from working capital and prior financings and will fund
any additional costs incurred from working capital and the net proceeds it
receives from this offering.
RoweCom has not yet developed formal contingency plans for the majority of the
critical systems. We believe that in the event of a failure of the Navision
accounting system, alternative systems that are Year 2000 Compliant will be
readily available at minimal cost. Because there is no real current alternative
for the ACH System, RoweCom is unlikely to be able to develop a contingency
plan to deal with a possible failure of such system to be Year 2000 Compliant.
In the event of a failure of the ACH System to be so compliant, RoweCom would
be required to rely on other payment methods, including credit cards. In the
event of a failure of any one of our other critical systems, we would be forced
to complete most transactions on a manual basis. RoweCom may also develop
additional contingency plans as the Year 2000 date change approaches in order
to deal with yet unknown Year 2000 issues.
Although RoweCom currently believes that the critical systems that it operates
will be Year 2000 Compliant, there can be no assurance that all of such systems
and the other critical systems maintained by third parties on behalf of RoweCom
will be Year 2000 Compliant by the end of 1999. A reasonably possible worst
case scenario might include one or more of the critical systems maintained by
one of our business partners being non-compliant. Any such failure could result
in a material disruption of our operations. Specifically, we could experience
interruptions in our ability to process orders with certain publishers, collect
and process receipts from credit cards or direct disbursement accounts,
accurately maintain accounting records and perform adequate customer service. A
failure by any of RoweCom's critical systems, or any other systems deployed by
us prior to the Year 2000 date change, to be Year 2000 Compliant could have a
material adverse effect upon our future results of operations and financial
condition.
RoweCom is not able to assess the Year 2000 Compliance of its clients. In the
event that a significant number of our clients face difficulties as a result of
the Year 2000 date change, such clients may be unable to process
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purchases through the kStore, or may face budgetary constraints that limit
knowledge resource purchasing. Any diminished purchasing by our clients as a
result of Year 2000 difficulties could have a material adverse effect on
RoweCom's future results of operations and financial condition.
Recent Accounting Pronouncements Applicable to this Offering
In March 1998, The American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. SOP 98-1 provides
guidance over accounting for computer software developed or obtained for
internal use including the requirement to capitalize specified costs and
amortization of such costs. RoweCom does not expect the adoption of this
standard to have a material effect on our capitalization policy.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS 133 will become effective in January 2000. SFAS
133 requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. To date RoweCom has not utilized derivative
instruments or hedging activities and, therefore, the adoption of SFAS 133 will
not have a material impact on RoweCom's financial position or results of
operations.
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Business
RoweCom is the leading business-to-business provider of e-commerce solutions
for purchasing and managing the acquisition of magazines, newspapers, journals,
books and other knowledge resources. RoweCom offers its clients access to the
largest catalog of such knowledge resources on the Internet and allows its
clients' employees to purchase knowledge resources easily and conveniently from
their desktop computers. RoweCom also provides businesses with a highly
effective means of managing and controlling purchases of knowledge resources
and reducing costs. RoweCom targets clients in knowledge-intense industries,
such as financial and professional services, high technology and healthcare, as
well as selected academic and non-profit institutions.
RoweCom's kStore(TM) facilitates decentralized purchasing of knowledge
resources by businesses and their employees while at the same time giving
management the tools required to effectively control knowledge resource
purchases. The kStore provides businesses with a single comprehensive source
for the purchase of knowledge resources, offering more than 43,000 magazines,
journals and newspapers from over 13,000 publishers, and approximately five
million books through RoweCom's alliance with barnesandnoble.com. The kStore's
automated service is easily accessible from an employee's desktop computer via
the corporate intranet or the Internet and permits the employee to find, order,
and pay for knowledge resources quickly and conveniently. At the same time, the
kStore provides managers with detailed reports of knowledge resource purchases
by their employees and permits them to institute customized approval
procedures. The kStore also helps management reduce the costs of knowledge
resource acquisition by eliminating many of the inefficiencies of traditional
knowledge resource acquisition methods and by offering discounted prices on
most titles.
Industry Overview
The effective use of knowledge resources has become an increasingly important
competitive advantage for businesses and other institutions. Timely and
relevant information, easily accessible to all members of an enterprise, has
become critical to job productivity. The quantity and the degree of
specialization of knowledge resources available to businesses and their
employees, and the cost of such resources have increased dramatically.
According to Veronis Suhler and Associates, Inc., US businesses spent
approximately $38 billion in 1997 on knowledge resources, such as market
studies, business magazines and professional publications, and other types of
business information, such as financial news services, credit reports and other
general business information. Veronis Suhler has forecasted that this spending
will grow to $51 billion by 2001. Based on US government census data and
projections, RoweCom believes that over the same period the number of US
professional workers that depend on knowledge resources will increase from 37
million to 41 million. As a result, businesses and other institutions need
efficient and cost effective methods for managing the growing number of
purchases of knowledge resources by employees.
The growth in demand for knowledge resources is occurring at a time when the
Internet and corporate intranets are becoming increasingly significant for
communications and e-commerce. International Data Corporation estimates that
business-to-business Internet commerce, including spending on knowledge
resources, will grow from an estimated $7.4 billion in 1997 to $179.4 billion
in 2001. RoweCom believes that spending on knowledge resources via the Internet
and corporate intranets has also accelerated in recent years and will increase
in the future.
Most companies currently do not have an efficient and easy-to-use means of
executing and managing purchases of knowledge resources. The process of
purchasing knowledge resources historically has involved significant manual
effort and has focused on the professional librarian or central purchasing
group, rather than the individual worker whose job performance depends on such
resources. This manually intensive, paper-based process requires finding the
appropriate publishers, submitting written or telephone orders, processing
multiple renewal notices, and completing expense reports for reimbursement.
Increasingly, individual employees are purchasing knowledge resources directly
from publishers and other vendors rather than ordering through a corporate
library or central purchasing group. As a result, employees are making numerous
individual purchases from a large number of publishers and services using a
variety of payment methods. RoweCom believes that for most businesses the
aggregate cost of purchases of knowledge resources made by individuals is
significantly larger than the knowledge resource budget of the corporate
library or central purchasing group. Decentralized purchases make it difficult
for businesses to manage employee purchases, control spending and prevent
duplicative or unauthorized orders.
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As knowledge resources have become more numerous and specialized, the marketing
and cost effective distribution of such knowledge resources to appropriate
users has become difficult for publishers and other content providers.
Conventional retail outlets do not reach the full range of individuals
purchasing knowledge resources and cannot physically stock the entire range of
knowledge resources available. In addition, the cost to the publisher of
maintaining inventories at multiple outlets is too high to allow the
distribution through such outlets of specialized knowledge resources that will
only sell in limited numbers at any one outlet.
The RoweCom Solution
RoweCom's business-to-business e-commerce solution provides clients and their
employees with an easy and convenient way to purchase and manage the
acquisition of knowledge resources through corporate intranets or the Internet.
From the desktop computer, a client's employee can access a customized RoweCom
Web site offering more than 43,000 magazines, newspapers and journals from over
13,000 publishers, and approximately five million books. RoweCom provides
businesses with a highly effective means of managing and controlling purchases
of knowledge resources and reducing costs. RoweCom also provides publishers and
other content providers with a unique distribution channel which enables
RoweCom to offer its clients additional content at lower prices. Key benefits
of the RoweCom solution include:
Convenience
RoweCom's kStore provides a single comprehensive source for the purchase of
knowledge resources. RoweCom offers its clients access to the largest combined
database of magazines, newspapers, journals, books and other knowledge
resources on the Internet. RoweCom's highly automated service provides an easy
and quick way to find, order, and pay for knowledge resources by providing
multiple electronic search functions and payment methods. These features
facilitate ordering and eliminate paper purchase orders, invoices, check
requests and manual approvals. The kStore can be made available through the
client's intranet site or the Internet, and may be accessed from an employee's
desktop computer, the corporate library or central purchasing group using a
point and click interface. The kStore also includes automated features, such as
subscription renewal notifications, and 24-hour, 7 days a week client support
via telephone and the Internet.
Control
RoweCom allows businesses to proactively manage their purchases of knowledge
resources through the implementation of customized purchase approval procedures
and the use of enterprise-wide purchasing reports. RoweCom also helps
businesses and their employees "buy smarter" by:
. indicating to employees which items have already been purchased by other
employees;
. creating greater awareness of available titles among employees; and
. allowing managers to analyze and guide employees' purchasing activities.
RoweCom helps clients reduce duplicate orders, increase shared use of knowledge
resources and enhance the likelihood that employees will purchase knowledge
resources that will maximize their productivity and performance.
Cost Savings
RoweCom offers substantial direct and indirect cost savings to its clients. The
kStore provides the lowest price available on the Internet for popular
magazines, and an additional 5% discount on the already discounted price of
books available directly from barnesandnoble.com. In addition, RoweCom offers
large volume clients the guaranteed lowest price on the Internet for all
subscriptions. Clients also achieve indirect cost savings through the kStore's
automated service, which reduces the manual processing of orders, approvals,
payment, claims and renewals. In addition, RoweCom enables enterprises to
reduce duplicate orders and facilitates resource sharing among employees.
Benefits to Publishers and other Content Providers
RoweCom provides publishers and other content providers with a number of
benefits, including:
. an efficient and low cost direct distribution channel to targeted buyers,
corporate libraries, and centralized purchasing groups; knowledge
resources are shipped at the time of purchase which enables vendors to
reduce the levels of inventory required and therefore reduce the costs
associated with stocking and returns;
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. an increase in the sales of many second and third tier magazines,
newspapers, journals, books and other knowledge resources that are not
typically stocked in physical locations and are generally hard to find;
and
. a unique distribution channel which enables RoweCom to offer its clients
additional content at lower prices.
Strategy
RoweCom's objective is to maintain and strengthen its position as the leading
business-to-business provider of e-commerce solutions for purchasing and
managing the acquisition of magazines, newspapers, journals, books and other
knowledge resources. Key elements of RoweCom's strategy include:
Penetrate the Business-to-Business Market
RoweCom seeks to increase the number of clients and individuals accessing the
kStore from the desktop computer. RoweCom targets companies in knowledge-
intense industries, such as financial and professional services, high
technology and healthcare, as well as certain academic and public institutions.
RoweCom is increasing its sales force to develop new client relationships and
to expand the use of the kStore by its existing clients by increasing the
awareness among, and availability to, the client's employees. RoweCom believes
that being the first knowledge resource purchasing solution on a client's
intranet promotes brand loyalty and provides it with a significant competitive
advantage. Once the kStore is adopted by the client, RoweCom is also well
positioned to add new services and knowledge resource offerings at minimal
additional cost. RoweCom also intends to increase its telesales efforts to
focus on small and mid-size businesses, educational institutions and government
agencies.
Increase Content and Functionality
RoweCom will continue to increase the content available to its clients and
enhance the capabilities of the kStore. This will reinforce its position as the
leading single source provider of knowledge resources to businesses on the
Internet and will increase the overall potential revenue per client. RoweCom
has significantly increased its catalog of knowledge resources through
strategic alliances with publishers and resellers, and has historically added
between 300-500 serial titles each month in response to requests from its
clients. In addition to expanding content, RoweCom has introduced new features
to the kStore, such as group-ordering which allows a designated individual to
order on behalf of a group of purchasers. RoweCom intends to further enhance
the kStore's functionality by adding new capabilities, such as collaborative
filtering, which provides users with information about purchases by other
individuals with similar buying profiles, and personalized recommendations of
knowledge resources based on individual profiles and purchasing patterns. We
believe that these new features may increase the volume and dollar size of
transactions per client.
Develop Strategic Alliances
RoweCom intends to continue to enter into strategic alliances to increase its
channels of distribution and available content. We recently entered into
strategic alliances with barnesandnoble.com and NewSub Services, which added
new distribution channels, substantial additional content and improved pricing.
RoweCom intends to enter into additional strategic distribution alliances to
obtain access to new clients and markets quickly and in a cost-effective
manner. Relationships with other vendors can provide access to additional
content offerings, such as electronic journals, aggregated full text archival
content, and databases that provide the most current information on any topic.
Enhance Brand Recognition
RoweCom intends to continue promoting the kStore as the leading business-to-
business e-commerce solution for purchasing and managing the acquisition of
knowledge resources. RoweCom intends to build brand recognition among
businesses through Web-based advertising, traditional advertising and
attendance and presentations at major trade shows. We believe that promoting
our reputation as the leading online provider of knowledge resources to the
business-to-business market will build loyalty among our client base, increase
usage of the kStore by clients' employees, attract new clients and promote the
value of our brand name. In addition, RoweCom believes that a strong brand name
will help it establish additional marketing and distribution alliances.
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Expand Internationally
RoweCom intends to expand its presence in markets outside the United States. By
adding foreign language content and localizing and translating the kStore user
interface, we intend to enhance our ability to fully service US-based clients
that have employees in other countries as well as non-US clients. RoweCom
expects to carry out its international expansion by means of strategic
alliances and, possibly, the acquisition of local content providers. Management
currently plans to commence its international expansion in Canada during the
second half of 1999.
RoweCom's Products And Services
The kStore
RoweCom's kStore provides each client with its own customized "company store"
which enables businesses and their employees to order, pay for and manage the
purchase of magazines, journals, newspapers, books and other knowledge
resources. The kStore can be customized for each client, quickly and easily.
RoweCom charges a fee, averaging approximately $5,000, for the initial
installation of the kStore on a client's intranet or for the set-up of a
customized Internet kStore site. The design of the kStore is open, scalable and
modular, which permits easy installation of additional features.
The following diagram illustrates the key steps involved in making a purchase
and implementing management policies using the kStore.
[DIAGRAM APPEARS HERE]
Access. Employees access the kStore easily through the corporate intranet or
the Internet. The secure customized site allows access only to qualified
corporate employees. The service may be customized for each client so that the
user interface and design is consistent with the corporate intranet and
reflects the client's pre-established purchase and payment policies. In
addition, the service may be customized to restrict the content available to
employees.
Search. The kStore offers a selection of search tools enabling employees to
quickly find knowledge resources by means of a variety of standard easy-to-use
methods, including searching by title, publisher, and standard cataloging
reference number. The kStore also provides additional information about a
title, including links to publisher Web sites and the Library of Congress.
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Select / Order. To select items, employees simply click on an icon to add a
book or subscription to their online shopping cart or remove products from
their shopping carts as they continue searching. The kStore provides employees
with price information and the identity of other employees in the enterprise
who have previously ordered the same item. Prior to executing orders, employees
may review the content of their cart, the number of titles ordered, and the
total purchase price including shipping and handling.
Approve. Once an order has been placed, it may be subject to one or more
approval levels that are based upon policies previously established by the
client for both order and payment. These approvals may be either passive, where
the kStore automatically compares the items ordered to a series of approval
rules pre-established by the client, or active, requiring the affirmative
approval of a supervising manager. The approval process occurs without the
participation of the employee.
Pay. RoweCom offers its clients several secure payment options including direct
debit, procurement card or credit card. Once the order and payment is approved
and processed, the employee receives an e-mail confirming that the order and
payment have been received and providing an estimated date that the knowledge
resource will be delivered.
Analyze Purchasing Patterns / Revise Policies. Using the kStore, managers can
obtain a variety of reports, including reports on purchases by location,
publication, and business area. These reports allow businesses to proactively
monitor purchasing of knowledge resources throughout the enterprise, to
implement and revise specific enterprise-wide purchasing policies, and to
optimize the use of knowledge resources within the enterprise. These reports
may be accessed online or ordered from RoweCom on a periodic basis.
Renew. Prior to the expiration date of a subscription, the kStore automatically
sends an e-mail notice to the purchasing employee to prompt the employee to
renew a subscription. This e-mail notice permits the employee to renew simply
by clicking on a single "renew" button on the e-mail notice. As with initial
purchases, clients may set up customized approval policies for subscription
renewals.
Content
RoweCom offers its clients access to the largest single source of magazines,
newspapers, journals, books and other knowledge resources on the Internet, with
access to more than 43,000 magazines, journals, and newspapers from over 13,000
publishers, approximately five million books from its alliance with
barnesandnoble.com, and approximately 2,200 newsletters and trade publications
from its alliance with Publications Resource Group. Of the 43,000 magazines,
journals and newspapers currently available from the kStore, approximately 800
are large circulation and general interest magazines and the balance consists
of business and trade magazines and scientific and medical journals. Annual
subscription rates range from under $50 for popular magazines to more than
$10,000 for certain scientific and medical journals. RoweCom will continue to
increase the content available to its clients to reinforce its position as the
leading single source provider of knowledge resources to businesses, and to
increase the overall potential revenue per client. Additional offerings are
expected to include electronic journals, aggregate full text archival content
and databases that provide the most current information on any topic. RoweCom
increases its catalog of knowledge resources through strategic relationships
with publishers and resellers as well as in response to requests from its
clients.
Management Tools
The kStore provides businesses with tools to better manage purchases of
knowledge resources by their employees. The kStore permits managers to create
single or multiple levels of approvals that govern purchases by employees. The
approvals that are included in a customized kStore may be either passive or
active. In a passive approval process, the order is compared to a series of
previously defined purchasing protocols. If the order meets the criteria set
forth in the protocol, the purchase is automatically approved. If the order
fails the protocol, it is either rejected or referred to a second approval
process, which may be active or passive. In an active approval process, the
affirmative approval by a supervising manager of an order is required to
consummate the purchase transaction. The active approval process can be
structured in a number of ways, including sending individual approval e-mails
to a manager requesting authorization for each order, and compiling collections
of requested approvals that may be reviewed on a periodic basis and then
approved either individually or collectively.
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Payment and Fulfillment
RoweCom has developed proprietary software that fully automates the ordering
and payment process. The system is able to accept multiple payment options
including credit cards and authorized debits to disbursement or procurement
accounts. Once orders are placed and approved, payment instructions are sent to
Banc One securely over the Internet. RoweCom has an ongoing relationship with
Bank One Corporation, the fifth largest bank holding company in the US and the
parent of Banc One, under which all orders are processed by the Banc One system
using RoweCom's proprietary software. RoweCom pays Banc One a nominal fee for
each item ordered through the kStore.
Although RoweCom does not fulfill or deliver any client's order for a knowledge
resource, it provides client support to ensure that the client's expectations
and needs are fulfilled with respect to each order. Client representatives are
available 24 hours per day, 7 days per week via the telephone and the Internet.
Client support provides a vital role in increasing sales to RoweCom's existing
client base by focusing on client satisfaction and on increasing the total
number of orders placed by each client.
Strategic Alliances
barnesandnoble.com Relationship
In August 1998, RoweCom entered into a five-year agreement with
barnesandnoble.com, a company jointly owned by Barnes and Noble, Inc. and
Bertelsman A.G., to combine and jointly market to business customers the
companies' respective catalogs. As a result of this agreement, RoweCom's
clients can access the largest combined database of magazines, newspapers,
journals, books and other knowledge resources on the Internet.
barnesandnoble.com currently markets to business customers over the Internet
through its Business Solutions service, which commenced operations in the third
quarter of 1998.
Under the agreement, barnesandnoble.com will provide all books ordered by
either party's business clients, and RoweCom will provide all magazine,
journal, and newspaper subscriptions ordered by its clients or by Business
Solutions clients. barnesandnoble.com will pay RoweCom a fixed percentage of
the purchase price of every book sold either through RoweCom's kStore or
barnesandnoble.com's Business Solutions service other than sales to Business
Solutions' clients as of the date of this agreement. RoweCom will pay
barnesandnoble.com a fixed amount or percentage of the purchase price of every
subscription sold by the kStore or the Business Solutions service, other than
sales to existing RoweCom customers as of the date of the agreement.
Users currently may access the barnesandnoble.com and RoweCom catalogs by means
of links found in the Business Solutions and the kStore Web sites. RoweCom and
barnesandnoble.com expect that the Business Solutions and the kStore sites will
each contain a complete catalog of RoweCom and barnesandnoble.com titles by the
end of the first quarter of 1999.
The agreement provides a framework for the parties to develop jointly an
integrated Web site to market and sell books, magazines and all other digital
media. This integrated Web site would combine both the kStore and Business
Solutions. However, management cannot be certain when, if ever, such an
integrated Web site would be initiated. barnesandnoble.com has also agreed that
it will not, prior to the launch of such an integrated Web site, enhance its
Business Solutions service to provide certain management control features such
as approval rules.
RoweCom believes that its relationship with barnesandnoble.com may enhance its
efforts to expand internationally as a result of the recent acquisition by
Bertelsman of a 50% interest in barnesandnoble.com. Bertelsman, one of the
largest global diversified media companies, sources and distributes a
significant amount of international content.
Other Significant Relationships
NewSub Services. In September 1998, RoweCom entered into content and
distribution agreement with NewSub Services, a consumer-based affinity marketer
for popular magazines, which provides RoweCom with additional content at low
prices. NewSub has agreed to offer its catalog of approximately 800 popular
titles through RoweCom's kStore at the guaranteed lowest publisher-authorized
price available on the Internet. RoweCom will, in turn, be the exclusive
provider of any RoweCom title not currently included in NewSub's title catalog
through NewSub Services' online magazine marketing and distribution channels.
Under the terms
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of the agreement with NewSub Services, each party will earn revenue on titles
sold through the other party's online distribution channel by receiving a
percentage of the gross sales price or a transaction fee for each of its
respective titles sold by the other party. This alliance is expected to be
implemented during the first quarter of 1999.
Intelisys Commerce. In August 1998, RoweCom entered into an agreement with
Intelisys to sell magazines, newspapers, journals, books and other knowledge
resources to Intelisys clients, providing RoweCom with a significant new
distribution channel for its products. Intelisys markets and sells software and
services that allow businesses to buy goods and services from vendors via the
Internet. Intelisys' clients will be able to access the kStore through the
Intelisys software. Under this agreement, Intelisys will receive a percentage
of any RoweCom title sold through an Intelisys distribution channel. In turn,
RoweCom will receive a percentage of the net revenue of each Intelisys software
installation for each client successfully referred by RoweCom to Intelisys.
This alliance is expected to be implemented in the first half of 1999.
Publications Resource Group. In October 1998, RoweCom entered into an agreement
with Publications Resource Group, whereby RoweCom obtains an additional
distribution channel and additional content. Publications Resource Group
markets and sells market research reports, newsletters, and other services to
businesses and consumers through catalogs and on the Internet. Publications
Resource Group will market RoweCom's kStore services and content through
Publication Resource Group's distribution channels, and RoweCom will distribute
Publication Resource Group's content through RoweCom's kStore. Publications
Resource Group will receive a percentage of the transaction fee for each
RoweCom title sold through a Publications Resource Group distribution channel
and RoweCom will receive a percentage of the gross sales price for each
Publications Resource Group title sold through the kStore. This alliance is
expected to be implemented in the first quarter of 1999.
Trilogy Software. In October 1998, RoweCom entered into a Memorandum of
Understanding with Trilogy Software, Inc., a management software provider. The
companies agreed to integrate Trilogy's Buying Chain software with RoweCom's
kStore to allow clients to make purchases of magazines, journals, newspapers
and books directly from the kStore using Trilogy's Buying Chain software
solution.
Ariba Technologies. In November 1998, RoweCom entered into a Memorandum of
Understanding with Ariba Technologies, Inc., a developer and supplier of
enterprise application software for operating resource management. Under this
agreement, Ariba will provide its customers with access to the kStore through
the Ariba Web site or the intranets Ariba installs for its customers, providing
RoweCom with an additional distribution channel for its products. Ariba will
also provide information about RoweCom to its worldwide sales force and include
RoweCom in its marketing materials.
Sales And Marketing
RoweCom's sales and marketing strategy is designed to attract new clients,
increase use of the kStore by existing clients and their employees, maximize
repeat purchases and renewals and develop additional revenue opportunities. Our
primary focus is a direct sales campaign to target companies in knowledge-
intense industries, such as financial and professional services, high
technology and healthcare, as well as certain academic and public institutions.
We believe this approach is both efficient and effective due to the size and
potential of the target market and the level of service to which the targeted
clients are accustomed. The majority of the direct sales effort is conducted by
RoweCom's national account managers, who are responsible for developing new
client relationships, primarily in the United States. RoweCom intends to
significantly increase the number of national account managers over the next 12
months, all of whom will initially focus on RoweCom's targeted markets. As of
December 31, 1998, there were six national account managers and in the first
month of 1999, RoweCom added 4 additional national account managers. However,
we do not expect to continue hiring national account managers at this rate. As
RoweCom hires additional national account managers, some or all of the national
account managers will begin to focus on additional targeted industries. We are
also increasing its telesales capacity in order to expand our direct sales
focus to small and mid-size businesses, academic institutions and government
agencies.
Once a client relationship has been established, a client is assigned an
Account Manager who helps to assess the client's needs, to customize the
kStore, and to develop a formal deployment plan designed to maximize the use of
the kStore. Account Managers serve as the primary client contact after the
initial sale and are responsible for maintaining the on-going relationship with
the client, working with the client to maximize the number of employees using
the kStore to purchase knowledge resources and to increase the number of
purchases per
34
<PAGE>
employee. RoweCom intends to add additional account managers over the next 12
months to service its expanding client base. RoweCom also offers 24-hour, 7
days a week client support via telephone and the Internet. Client support
provides a vital role in increasing sales to RoweCom's existing client base by
focusing on client satisfaction and on increasing the total number of orders
placed by each client.
RoweCom's marketing efforts also include print and Web advertising, direct
mailings, participation in trade shows, co-marketing with strategic partners,
and public relations campaigns to build and reinforce RoweCom's brand
recognition.
Clients
RoweCom targets companies in knowledge-intense industries, such as financial
and professional services, high technology and healthcare, as well as certain
academic and public institutions. At December 31, 1998, RoweCom had
approximately 187 clients, of which approximately 150 were companies and 37
were academic and non-profit organizations. RoweCom's largest clients by
revenue are in the high technology and healthcare sectors. The following is a
representative list of clients of RoweCom, by industry sector.
High Technology Professional Services Healthcare
BASF Corporation Arthur Andersen LLP Aurora Healthcare
Hewlett Packard Company Ernst & Young LLP Massachusetts General
Lawrence Livermore PricewaterhouseCoopers Hospital
National Laboratory LLP National Institutes of
Health
Financial Services Academic
First Chicago NBD Johns Hopkins University
First Union Corporation Ohio University
Blue Cross/Blue Shield University of California at
Association San Francisco
Competition in the Knowledge Resource Industry
The market for the sale of magazines, newspapers, journals, books and other
knowledge resources to businesses is intensely and increasingly competitive. We
have not yet had significant direct competition from other companies offering a
service for purchasing and managing the acquisition of subscriptions and books
with management control features comparable to those of the kStore. However, we
expect that such competition will develop in the short term and it may have an
adverse impact on our business. RoweCom's competitive landscape has been, and
will continue to be, impacted by changes in the prevalence and acceptance of
online commerce and changes in the knowledge resources industry. RoweCom
believes that the principal competitive factors in its emerging market will be
brand recognition, extent of content offerings, convenience, management
control, customization, price, client service, and a combined familiarity with
the knowledge market and the latest enabling technologies.
RoweCom currently competes, or may in the future compete, directly or
indirectly with companies that fall within the following categories:
. large, well-established news and information providers such as Dow
Jones, Knight-Ridder, Lexis/Nexis, Pearson, Reuters and Thomson, any of
which might in the future decide to expand their product offerings to
include magazines, newspapers, journals, books and other knowledge
resources of the type offered by RoweCom;
. traditional subscription agents, who may decide to focus on the
corporate market, expand their service to include control and management
features, and significantly expand their knowledge resource offerings;
. major consumer based online book resellers, such as Amazon.com, or
Borders.com who may also decide to focus on the business-to-business
market, expand their service functionality to include control and
management features such as those offered by RoweCom, or expand their
knowledge resources offerings;
35
<PAGE>
. consumer online services and portals such as Yahoo! and America Online
which may decide to focus on the business-to-business market and expand
their knowledge resources offering and management and control features;
. publishers and information providers which may decide to increase their
direct marketing efforts to the business-to-business market or develop a
competing service similar to the kStore; and
. enterprise-wide supplier management system providers which may decide to
focus specifically on the knowledge resources markets.
Intellectual Property
RoweCom regards its copyrights, service marks, trademarks, trade dress, trade
secrets and similar intellectual property as critical to its success, and
relies on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, clients, partners
and others to protect its proprietary rights. RoweCom pursues the registration
of its trademarks and service marks in the U.S., and has applied for the
registration of certain of its trademarks and service marks. We have been
granted trademark registrations for the marks "RoweCom" and "Subscribe," each
of which will remain in full force and effect without further action by RoweCom
until December 2003. RoweCom also has pending registration applications for the
marks "Knowledge Acquisition Manager," "Knowledge Acquisition Reporter," each
of which have been preliminarily approved by U.S. Patent and Trademark Office.
RoweCom also has pending registration applications for the marks "kStore,"
"knowledgeStore," and "kWorld," "Knowledge World" and "Knowledge For Your
Business." These applications are currently awaiting examination by the U.S.
Patent and Trademark Office. RoweCom has not sought trademark, service mark or
copyright protection outside of the United States and effective protection may
not be available in every country in which our products and services are made
available online.
Technology
RoweCom uses both proprietary solutions and commercially available licensed
technologies. RoweCom's services are built using industry standard Microsoft NT
products utilizing the Internet Information Server, Microsoft Transaction
Server, and SQL Server for database transactions. RoweCom is using products
utilized by other industry leaders. In addition, all of RoweCom's services are
designed to process information using standard Electronic Data Interchange
transactions as defined for the serials and periodicals industry, and RoweCom
is actively engaged with other leading e-commerce providers to develop XML
versions of these transactions. RoweCom seeks to maintain transaction security
through the use of industry standard SSL transactions, and uses proprietary EDI
interfaces and private networks to ensure the integrity of client order
information and credit card transactions. RoweCom is able to scale the number
of transactions that will be supported using load balancing and performance
management tools developed for its standard platform. RoweCom uses high
performance Web and database servers on enterprise-level systems and has
established high-performance Internet service provider links to ensure the
availability of bandwidth.
RoweCom's systems are supported by an experienced staff of developers and
technicians, who are responsible for both system development and maintenance.
This staff, which was comprised of 28 individuals as of December 31, 1998, is
primarily headquartered in our facilities in London, Ontario. This group mainly
focuses on back office processing and developing interfaces that permit
RoweCom's services to be customized to the particular needs of a client and to
be linked with corporate intranets, Internet service providers, content
providers and other online services. Many of RoweCom's development and support
professionals have specialized experience with particular segments in the
knowledge resource marketplace (e.g. corporate clients, corporate libraries,
educational institutions, public libraries, and consumers).
Employees
As of December 31, 1998, RoweCom had 95 full-time and 6 part-time employees.
RoweCom also employs a limited number of independent contractors and temporary
employees on a periodic basis. None of RoweCom's employees are represented by a
labor union and we consider our labor relations to be good.
RoweCom believes its success depends to a significant extent on its ability to
attract, motivate and retain highly skilled management and employees. To this
end, we focus on incentive programs such as employee stock options, competitive
compensation and benefits for its employees.
36
<PAGE>
Facilities
RoweCom is headquartered in Cambridge, Massachusetts where it leases
approximately 11,304 square feet pursuant to a term lease that expires on
October 31, 1999. These facilities are used for executive office space,
including sales and marketing and finance and administration, and client
support. In addition, RoweCom maintains a regional office in London, Ontario
where it leases approximately 7,733 square feet of office space pursuant to a
term lease that expires on October 31, 2001. These facilities are used for
research and development, technical support and content acquisition.
Legal Proceedings
RoweCom is not a party to any material litigation, and believes that no
litigation that has been threatened to be brought against RoweCom to date will
have a material adverse effect on its financial position or results of
operations or cash flows.
37
<PAGE>
Management
Executive Officers and Directors
The following sets forth certain information with respect to the directors and
executive officers of RoweCom as of the date of this prospectus.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Name Age Position(s)
- ---------------------------------------------------------------------------
<C> <C> <S>
Dr. Richard Rowe, Ph.D. 65 Chairman of the Board of Directors, President,
Chief Executive Officer and Director
Executive Vice President and Chief Financial
Louis Hernandez, Jr. 32 Officer
Steven Woit 40 Vice President, Content
Walter Crosby 40 Vice President and Chief Technology Officer
Stephen Vozella 52 Vice President, Fulfillment
Ronald Grigg 47 Vice President, Design and Development
Robert Rea 37 Sales and Service Director
Thomas Lemberg* 52 Director
Jerome Rubin+ 63 Director
Philippe Villers 63 Director
John Kennedy*+ 40 Director
Stanley Fung 41 Director
</TABLE>
- --------
* Member of Compensation Committee
+ Member of Audit Committee
Richard Rowe Ph.D., the founder of RoweCom, has served as Chairman of the
board, President and Chief Executive Officer of RoweCom since 1994. Prior to
founding RoweCom, from 1979 to 1993, Dr. Rowe was the President and CEO of the
Faxon Company, one of the world's largest library subscription agencies. Prior
to joining Faxon, Dr. Rowe was the Associate Dean of the Harvard Graduate
School of Education, Director of Harvard's interfaculty Doctoral Program in
Clinical Psychology and Public Practice, and Director of the Cambridge office
of the American Institutes for Research. Dr. Rowe holds a Ph.D. in clinical
psychology.
Louis Hernandez, Jr. has served as RoweCom's Executive Vice President since
January 1998 and Chief Financial Officer since February 1997. From February
1997 to December 1997, Mr. Hernandez also served as the Vice President of
RoweCom. Prior to joining RoweCom, Mr. Hernandez served as the Chief Financial
Officer and Corporate Secretary for U.S. Medical Instruments, Inc., a high
technology medical device company. From 1990 to 1996, Mr. Hernandez worked in
the business and advisory services group of Price Waterhouse LLP. Mr. Hernandez
is a certified public accountant.
Steven Woit has served as Vice President, Content since January 1998. Prior to
joining RoweCom, from 1980 to 1998, Mr. Woit had worked with International Data
Group as Vice President of New Product Development Division in independent
business units within International Data Group, including Federal Computer
Week, CIO Magazine, and Digital News. From January 1997 until December 1997,
Mr. Woit was General Partner with IDG Ventures. From September 1996 to December
1996 Mr. Woit was Chief Executive Officer of Web Shopper. Mr. Woit served as
Executive Vice President at Computerworld, Inc. from September 1994 to
September 1996.
Walter Crosby has served as Vice President and Chief Technical Officer since
June 1998. Prior to joining RoweCom, from October 1997 to June 1998, Mr. Crosby
was an independent consultant. From January 1995 to October 1997, Mr. Crosby
was Chief Information Officer and Vice President for Information Systems for
Computerworld, Inc. Prior to joining Computerworld, Inc., Mr. Crosby was
Corporate Director of Management Information Systems for Ziff Davis Publishing
Company from June 1990 to January 1995.
Stephen Vozella has served as Vice President, Fulfillment since June 1998.
Prior to joining RoweCom, from September 1993 to October 1996, Mr. Vozella
served as Vice President and Chief Information Officer for Fund Services at
First Data Investor Services Group. From May 1989 to June 1993, Mr. Vozella
held various senior management positions at Fidelity Investments including Vice
President, Information Technology, Retail Investor Services, and Vice
President/General Manager, Boston Telephone Operations.
38
<PAGE>
Ronald Grigg has served as Vice President, Design and Development since
December 1994. Prior to joining RoweCom, from 1982 to 1994 Mr. Grigg served as
the Director of Corporate Information Services for Faxon Canada Ltd. Prior to
joining Faxon, Mr. Grigg was the Systems Analyst for R.J. Thompson Data Systems
of London Ontario, where he designed customized accounting, inventory control
and general ledger software.
Robert Rea was appointed Sales and Service Director for RoweCom in November
1998. From April 1998 through October 1998, Mr. Rea was Business Development
Manager for RoweCom. From 1996 to 1998, Mr. Rea was Vice President, Sales and
Marketing for Ovum, Inc., an international research and information firm. From
1989 to 1996, Mr. Rea worked at Giga Information Group, most recently as
Eastern Regional Sales Manager where he was responsible for sales of
information technology products.
Thomas Lemberg has served as a director of RoweCom since May 1996. Mr. Lemberg
is Senior Vice President and General Counsel of the Polaroid Corporation. Prior
to joining the Polaroid Corporation, from 1987 to 1995, Mr. Lemberg was the
Vice President and General Counsel of Lotus Development Corporation.
Jerome Rubin has served as a director of RoweCom since May 1995. Mr. Rubin has
been Managing Director of Veronis, Suhler & Associates, Inc., an investment
banking firm specializing in the media and communications industry since 1995.
From 1991 through 1995, Mr. Rubin was also the Chairman Emeritus of the MIT
Media Lab's "News in the Future" consortium. Mr. Rubin has also been Chairman
of E-Ink, a development stage company since 1997. In 1973, Mr. Rubin founded
and was the first president of LEXIS/NEXIS, the first online legal database
service. From 1983 to 1991, Mr. Rubin was the Group Vice President/Chairman for
Professional Information and Book Publishing at the Times Mirror Company.
Philippe Villers has served as a director of RoweCom since August 1998. Mr.
Villers has been President and board Member of GrainPro, Inc. since 1996. Since
1981, he has also served as founder, President, and board Member of Families
USA Foundation. From 1985 to 1988, Mr. Villers previously founded and led
Cognition, Inc. where he served as President for three years. Prior to 1988, he
co-founded Computervision, Inc. and Automatix, Inc.
John Kennedy has served as a director of RoweCom since February 1999. Mr.
Kennedy is Director of Sales of M/Net, a division of PSDI Limited. Prior to
joining M/Net, from 1991 to 1997, Mr. Kennedy was the president of the
Efficient Systems Division of A.R.M. Group Inc.
Stanley Fung has served as a director of RoweCom since December 1998. Mr. Fung
has been a managing director of Zero Stage Capital Company since 1992. Prior to
joining Zero Stage in 1992, Mr. Fung was an investment manager in Advent
International, an international venture capital firm.
Board of Directors
At the first annual meeting of stockholders after the completion of this
offering, RoweCom's board of directors will be divided into three classes of
directors. Directors in the first class will be elected for a one-year term,
those in the second class will be elected for a two-year term, and those in the
third class will be elected for a three-year term. The board of directors has
not yet determined which directors will be in each class. At each subsequent
annual meeting, stockholders will elect replacements for the directors whose
term is then expiring, and the directors so elected will serve for a three-year
term.
RoweCom's board of directors has established a compensation committee and an
audit committee. The members of the compensation committee are Thomas Lemberg,
and John Kennedy, and the members of the audit committee are Jerome Rubin, and
John Kennedy.
Directors are elected by the stockholders at each annual meeting of
stockholders to serve until the next annual meeting of stockholders or until
their successors are duly elected and qualified. The current and continuing
directors of RoweCom were nominated and elected in accordance with the Second
Amended and Restated Stockholders Agreement, dated as of December 11, 1998,
which will terminate upon the closing of this offering.
Executive officers of RoweCom are appointed by its board of directors and serve
until their successors have been duly elected and qualified. There are no
family relationships among any of the executive officers or directors of
RoweCom.
39
<PAGE>
RoweCom anticipates that, following this offering, directors who are employees
of RoweCom will not be paid any fees or receive any additional compensation for
service as members of the board of directors or any committee of the board
other than the issuance of options to purchase shares of common stock under the
1999 Non-Employee Director Stock Option Plan and RoweCom will enter into
customary arrangements with respect to fees and other compensation, including
expense reimbursement, for directors who are not employees of RoweCom or any of
its subsidiaries. See "Management--Stock Incentive Plans--1999 Non-Employee
Director Stock Option Plan." RoweCom maintains directors' and officers'
liability insurance and its certificate of incorporation provides for mandatory
indemnification of directors and officers to the fullest extent permitted by
Delaware law. In addition, RoweCom's certificate of incorporation limits the
liability of its directors or its stockholders for breaches of the directors'
fiduciary duties to the fullest extent permitted by Delaware law. See
"Description of Capital Stock--Delaware Law and Certain Charter and By-Law
Provisions."
Compensation Committee Interlocks and Insider Participation
In May 1997, RoweCom's board of directors established a compensation committee.
The compensation committee is responsible for reviewing and approving all
compensation arrangements for officers of RoweCom and for administering its
stock option and stock purchase plans. During the period from May 1997 to the
end of 1997, the Compensation Committee was composed of Thomas Lemberg, Daniel
Nova, a former director of RoweCom who is affiliated with Highland Capital
Partners III Limited Partnership, a stockholder of RoweCom, and James Whitaker,
a former director of RoweCom who is affiliated with Working Ventures Canadian
Fund Inc. The current compensation committee consists of Thomas Lemberg,
Stanley Fung, and John Kennedy.
Employment and Non-Competition Agreements
With the exception of Mr. Hernandez, none of RoweCom's executive officers has
an employment contract, and each of such officers serves at the discretion of
RoweCom's board of directors. Mr. Hernandez is party to an Employment
Agreement, dated as of November 4, 1998, with RoweCom that provides for Mr.
Hernandez to be employed as RoweCom's Executive Vice President and Chief
Financial Officer for a period ending on December 31, 2000, subject to
extension by mutual consent. Under the terms of the Employment Agreement, Mr.
Hernandez is to be paid a base annual salary of $130,000 with the possibility
of annual cash bonuses equal to up to 50% of the base salary, based upon the
achievement of certain performance targets to be agreed upon by Mr. Hernandez
and RoweCom's Chief Executive Officer from time to time. The Employment
Agreement also contains non-competition and non-solicitation provisions that
are intended to survive the termination of employment for a period of 12
months.
Dr. Rowe and Messrs. Hernandez, Woit, and Grigg are each parties to Non-
Competition Agreements with RoweCom under which they have agreed not to compete
with the business of RoweCom or solicit its customers or employees for a period
of 18 months after termination of employment, in the case of Dr. Rowe, and 12
months after termination of employment, in the case of each of the other
officers. Under the terms of these Non-Competition Agreements, if the relevant
officer is terminated other than for Cause, as defined in the Non-Competition
Agreement, or resigns for Good Reason, also as defined in the Non-Competition
Agreement, RoweCom will pay to the officer for the duration of the non-
competition period a monthly non-competition payment equal to two-thirds of his
monthly salary at the time of termination. RoweCom has the option of ceasing
these payments at any time during the non-competition period, at which time the
officer's non-competition and related obligations under the Non-Competition
Agreement would cease.
40
<PAGE>
Executive Compensation
Summary Compensation Table
The following table sets forth certain information concerning the compensation
earned during the year ended December 31, 1998 for (i) RoweCom's Chief
Executive Officer and (ii) each other executive officer of RoweCom whose total
salary and bonus may exceed $100,000 for services rendered to RoweCom and its
subsidiary during 1998. For disclosure regarding terms of the stock options,
see "Management--Stock Incentive Plans."
<TABLE>
<CAPTION>
----------------------------------
Annual Long-Term
Compensation Compensation Options
------------ ---------------------
(Number of Securities
Underlying Options
Salary(1) Granted)
Name and Position(s) ------------ ---------------------
<S> <C> <C>
Richard Rowe, Ph.D........................ $153,000 --
Chairman of the board of directors,
President, Chief Executive Officer
and Treasurer
Louis Hernandez, Jr....................... 124,000 140,687
Executive Vice President and Chief
Financial Officer
Steven Woit............................... 119,000 55,208
Vice President, Content
Ronald Grigg.............................. 88,000 8,726
Vice President, Design and Development
</TABLE>
- --------
(1)Excludes certain perquisites and other benefits the amount of which did not
exceed 10% of the employee's total salary and expected bonus. RoweCom has
allocated approximately $260,000 for the payment of bonuses to employees for
bonuses earned with respect to 1998. No determination will be made regarding
the allocation of bonuses to these officers until after this offering.
Option Grants in Last Fiscal Year
The following table sets forth certain information concerning stock options
granted to each of the officers named in the Summary Compensation Table that
received such options during 1998. No stock appreciation rights were granted to
these individuals during such year. As of December 31, 1998, Richard Rowe did
not have any stock options.
Individual Grants
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Number of Stock Price
Securities % of Total Appreciation for
Underlying Options Granted Option Term(2)
Options to Employees Price Expiration ---------------------
Granted(1) in 1998 Per Share Dates 5% 10%
Name ---------- --------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Louis Hernandez, Jr. ... 22,688 2.77% $ .72 1/29/08 $ 441,220 $ 679,127
63,292 7.73% .72 5/21/08 1,230,856 1,894,540
54,707 6.68% 2.86 9/10/98 946,829 1,520,489
Steven Woit............. 17,453 2.13% .72 1/29/08 339,413 522,426
37,755 4.61% .72 5/21/08 734,232 1,130,132
Ronald Grigg............ 8,726 1.07% .72 1/29/08 169,697 261,198
</TABLE>
- --------
(1)Shares underlying options generally vest over a four-year period, unless
accelerated in accordance with the stock option agreements governing such stock
options. For information regarding terms of the stock options, see
"Management--Stock Incentive Plans."
(2)Assumes increases in the fair market value of the common stock of 5% and 10%
per year from $13, the mid-point of the range set forth on the cover of this
prospectus, over the ten-year option period as mandated by the rules and
regulations of the Securities and Exchange Commission, and does not represent
RoweCom's estimate or projection of the future value of the common stock. The
actual value realized may be greater or less than the potential realizable
values set forth in the table.
41
<PAGE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth certain information concerning option exercises
during 1998 and option holdings at December 31, 1998 with respect to each of
the officers named in the Summary Compensation Table that held options. As of
December 31, 1998, Richard Rowe did not have any stock options.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired on Value Options at In-the-Money Options at
Exercise Realized December 31, 1998(1) December 31, 1998(2)
Name ----------- -------- ------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Louis Hernandez, Jr..... -- -- 4,887 160,234 $ 60,012 $1,863,710
Steven Woit............. -- -- -- 55,208 -- 677,954
Ronald Grigg............ -- -- 14,544 11,634 168,274 140,814
</TABLE>
- --------
(1)"Exercisable" refers to those options which were both exercisable and
vested, while "Unexercisable" refers to those options which were unvested.
(2)Value is determined by subtracting the exercise price per share from $13,
the mid-point of the range set forth on the cover page of this prospectus, and
multiplying the result by the number of shares underlying the options.
Stock Incentive Plans
Amended and Restated 1998 Stock Incentive Plan
In February 1999, RoweCom's board of directors and stockholders approved
RoweCom's Amended and Restated 1998 Stock Incentive Plan, which provides for
the grant of incentive stock options, nonqualified stock options and restricted
stock awards to employees (including officers and employee directors) and
consultants. A maximum of 872,625 shares of common stock are currently reserved
for issuance pursuant to this plan. This maximum number of shares will
increase, effective as of January 1, 2000, and each January 1 thereafter during
the term of the plan, by an additional number of shares of common stock equal
to 5% of the total number of shares of common stock issued and outstanding as
of the close of business on the preceding December 31. No participant in this
plan may in any year be granted stock options or awards with respect to more
than 383,955 shares of common stock.
The Amended and Restated 1998 Stock Incentive Plan is administered by the
compensation committee of RoweCom's board of directors, which has the authority
to determine which eligible individuals are to receive options or restricted
stock awards, the terms of such options or awards, the status of such options
as incentive or nonqualified stock options under the federal income tax laws,
including the number of shares, exercise or purchase prices and times at which
the options become and remain exercisable or restricted stock vests and the
time, manner and form of payment upon exercise of an option. The exercise price
of options granted under this plan may not be less than 85% of the fair market
value of a share of common stock on the date of grant, or 100%, in the case of
incentive stock options. The options become exercisable at such time or times
as are determined by the compensation committee and expire after a specified
period that may not exceed ten years.
Upon the acquisition of 50% or more of RoweCom's outstanding common stock
pursuant to a hostile tender offer, each option granted to an officer of
RoweCom, if it has been outstanding for at least six months, will automatically
be canceled in exchange for a cash distribution to the officer based upon the
difference between the tender offer price and the exercise price of the option.
In the event RoweCom is acquired, vesting of options and restricted stock
awards granted under the Amended and Restated 1998 Stock Incentive Plan will
accelerate to the extent that the options or RoweCom's repurchase rights with
respect to restricted stock awards are not assumed by or assigned to the
acquiring entity. The compensation committee also has discretion to provide for
accelerated vesting of options and restricted stock awards upon the occurrence
of certain changes in control. Accelerated vesting may be conditioned upon
subsequent termination of the affected optionee's service.
With the consent of an option holder, the compensation committee can cancel
that holder's options and replace them with new options for the same or a
different number of shares having an exercise price based upon the fair market
value of RoweCom's common stock on the new grant date.
42
<PAGE>
As of December 31, 1998, no shares had been issued upon exercise of options
granted under the Amended and Restated 1998 Stock Incentive Plan, options for
285,219 shares were outstanding and options to purchase 587,406 shares were
available for future grant under this plan.
RoweCom's board of directors may amend or modify the Amended and Restated 1998
Stock Incentive Plan at any time, subject to the rights of holders of
outstanding options. This plan will terminate on May 4, 2008.
1999 Non-Employee Director Stock Option Plan
In February 1999, RoweCom's board of directors and its stockholders approved
the 1999 Non-Employee Director Stock Option Plan. Under this plan, each
director of RoweCom who is not also an employee of RoweCom will receive upon
the commencement of this offering, or upon later initial election to RoweCom's
board of directors, an option to purchase 10,472 shares of common stock.
Additionally, after a director's initial grant, the director will receive, as
of each date on which he is reelected as a director (but not more frequently
than 3 years), an option to purchase 10,472 shares of common stock minus the
number of options previously granted under this plan which have not yet vested.
Options are granted under the plan at an exercise price equal to the fair
market value of the common stock on the date of grant. They vest monthly, at
the rate of 3,491 shares a year, and have a term of ten years. An aggregate of
87,263 shares of common stock have been reserved for issuance under this plan.
1999 Employee Stock Purchase Plan
In February 1999, RoweCom's board of directors and stockholders approved the
1999 Employee Stock Purchase Plan, which enables eligible employees to acquire
shares of common stock through payroll deductions. This plan is intended to
qualify as an "employee stock purchase plan" under Section 423 of the Internal
Revenue Code of 1986, as amended. The initial offering period will start on the
date of this prospectus and end on June 30, 1999, unless otherwise determined
by RoweCom's board of directors. Subsequent offerings under this plan are
planned to start on January 1 and July 1 of each year and end on June 30 and
December 31 of each year. During each offering period, an eligible employee may
select a rate of payroll deduction of from 1% to 10% of compensation, up to an
aggregate of $12,500 in any offering period. The purchase price for the common
stock purchased under this plan is 85% of the lesser of the fair market value
of the shares on the first day or the last day of the offering period. An
aggregate of 872,625 shares of common stock have been reserved for issuance
under this plan.
1997 Stock Incentive Plan
In May 1997, RoweCom's board of directors and its stockholders approved
RoweCom's 1997 Stock Incentive Plan, which provides for the grant of incentive
stock options, nonqualified stock options and restricted stock awards to
employees, including officers and employee directors, and consultants. A
maximum of 114,618 shares of common stock have been reserved for issuance under
this plan. No participant in the 1997 Stock Incentive Plan may in any year have
been granted stock options or awards with respect to more than 52,358 shares of
common stock. No more than an aggregate of $100,000 or such other limit as may
be imposed by the Internal Revenue Code with respect to the aggregate fair
market value of the options as of the grant date may be exercised for the first
time by a participant under the 1997 Stock Incentive Plan. This limitation does
not apply to nonqualified stock options or restricted stock awards.
The 1997 Stock Incentive Plan is administered by the compensation committee,
which has the authority to determine which eligible individuals are to receive
options or restricted stock awards, the terms of such options or awards, the
status of such options as incentive or nonqualified stock options under the
federal income tax laws, including the number of shares, exercise or purchase
prices and times at which the options become and remain exercisable or
restricted stock vests and the time, manner and form of payment upon exercise
of an option. The exercise price of options granted under this plan have been
determined by the compensation committee. These options were granted at 100% of
fair market value of the underlying common stock, in the case of incentive
stock options, and 110% of fair market value in the case of options granted to
10% or greater stockholders, measured in each case at the time of grant. The
options become exercisable at such time or times as determined by the
compensation committee and expire after a specified period that may not exceed
ten years, or five years, in the case of a greater than 10% stockholder. All
the 113,554 options that have been granted by the Company pursuant to this plan
will vest and become exerciseable upon a "Liquidity Event", as
43
<PAGE>
defined in the agreements representing the options granted under this plan. The
consummation of this offering and a sale of RoweCom will constitute a
"Liquidity Event" for such purpose. Accordingly, all of such options will vest
and become exerciseable immediately after such event.
With the consent of an option holder, the compensation committee can cancel
that holder's options and replace them with new options for the same or a
different number of shares having an exercise price based upon the fair market
value of the common stock on the new grant date.
As of December 31, 1998, 698 shares had been issued upon the exercise of
options granted under the 1997 Stock Incentive Plan, and options for 113,554
shares had been granted under this plan.
RoweCom's board of directors may amend or modify the 1997 Stock Incentive Plan
at any time, subject to the rights of holders of outstanding options. This plan
will terminate on April 25, 2007.
44
<PAGE>
Transactions Among Related Parties
In November 1996, Philippe Villers, a director of RoweCom, loaned RoweCom the
principal amount of $200,000. In January, 1997, Jerome Rubin, a director of
RoweCom, loaned RoweCom the principal amount of $100,000. In April, 1997, in
exchange for the cancellation of the indebtedness of RoweCom to Mr. Villers and
Mr. Rubin, RoweCom issued to Mr. Villers and Mr. Rubin 80,646 and 40,322 shares
of RoweCom's Class A Preferred Stock, respectively. RoweCom also issued to Mr.
Villers and Mr. Rubin, for no additional consideration, stock purchase warrants
providing for the purchase of up to 28,149 and 14,074 shares of RoweCom's
capital stock, respectively. Each of the stock purchase warrants will be
exercisable for shares of RoweCom's common stock at a strike price of $0.89 per
share, subject to any stock dividend, stock split, or similar event. In the
event that either of the stock purchase warrants are not exercised prior to the
consummation of this offering, such stock purchase warrant will be deemed to be
exercised on a "net" basis such that a portion of the shares available under
the stock purchase warrant having a value, determined with respect to the
difference between the price of the common stock in this offering and the
strike price of the stock purchase warrant, will be deemed to have been
surrendered in payment of the exercise price for the remaining shares available
under the stock purchase warrant.
In April 1997, Working Ventures Canadian Fund Inc. acquired 1,611,568 shares of
Class A Preferred Stock of Rowe Communications Ltd. ("RoweCom Canada"), and an
option to exchange shares of RoweCom Canada Class A Preferred Stock for shares
of common stock of RoweCom, for US $4,000,000. In May 1998, in connection with
the sale of RoweCom's Class B Preferred Stock, the Class A Exchange Option was
amended to permit Working Ventures to exchange its 1,611,568 shares of RoweCom
Canada Class A Preferred Stock for 3,163,306 shares of the Class A-1 Preferred
Stock of RoweCom.
In May 1998, Crystal Internet Venture Fund, L.P., Highland Capital Partners III
Limited Partnership, Highland Entrepreneurs' Fund III Limited Partnership, and
three other unaffiliated third parties purchased an aggregate of 5,140,370
shares of RoweCom's Class B Preferred Stock for an aggregate purchase price of
$6,500,000 and Working Ventures acquired 1,186,240 shares of Class B Preferred
Stock of RoweCom Canada, and an option to exchange such RoweCom Canada Class B
Preferred Stock for an equal number of shares of the Class B Preferred Stock of
the Company, for an aggregate purchase price of $1,500,000.
In December 1998, Axiom Venture Partners II Limited Partnership, Zero Stage
Capital VI, L.P., Working Ventures, Crystal Internet Venture Fund, L.P.,
Highland Capital Partners III Limited Partnership, and other unaffiliated
parties purchased an aggregate of 4,586,599 shares of RoweCom's Class C
Preferred Stock for an aggregate purchase price, net of expenses, of
$15,531,599. All of Working Ventures' shares, together with the remaining
outstanding shares of RoweCom's Class A Preferred Stock, Class A-1 Preferred
Stock, Class B Preferred Stock, and Class C Preferred Stock will convert into
common stock upon the consummation of this offering in accordance with their
terms.
In February 1999, RoweCom and Working Ventures entered into an Exchange Option
Exercise Agreement under which Working Ventures agreed to exchange all of its
RoweCom Canada Class A Preferred Stock and Class B Preferred Stock for shares
of RoweCom's Class A-1 Preferred Stock and Class B Preferred Stock,
respectively, effective immediately prior to the consummation of this offering.
Under the terms of the Exchange Option Exercise Agreement and a Second Amended
and Restated Stockholders Agreement to which Working Ventures and RoweCom are
parties, each share of RoweCom Canada Class A Preferred Stock will be exchanged
for 1.963 share of Class A-1 Preferred Stock of RoweCom and each share of Class
B Preferred Stock of RoweCom Canada will be exchanged for one share of Class B
Preferred Stock of RoweCom.
Working Ventures has agreed that, in the event that certain circumstances occur
after the exercise of the Series A Exchange Option, after the consummation of
this offering, it will transfer, for no additional consideration, an aggregate
of 310,371 shares of common stock to the other stockholders and optionholders
of RoweCom who held such stock or options on the date that the RoweCom Class A
Preferred Stock was originally issued, including Richard Rowe, Ph.D., the
Chairman of the board of directors, President and Chief Executive Officer of
RoweCom, Thomas Lemberg, Jerome Rubin, and Philippe Villers, each a director of
RoweCom, Louis Hernandez, Jr., the Executive Vice President and Chief Financial
Officer of RoweCom, Steven Woit, the Vice President, Sources of RoweCom, Ronald
Grigg, the Vice President, Design and Development of RoweCom and PV Securities
Corp., a Massachusetts securities corporation of which Philippe Villers, a
director of RoweCom, is the sole stockholder. Set forth below is a chart that
describes the number of
45
<PAGE>
shares of common stock that may be received by the individuals and entity named
above as a result of the transfer of these shares of common stock by Working
Ventures, after giving effect to the conversion of all shares of Class A-1
Preferred Stock into common stock upon consummation of this offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Impact of Possible Share Transfer."
<TABLE>
<CAPTION>
--------------
Shares of
Common Stock
to be Received
Shareholder --------------
<S> <C>
Richard Rowe, Ph.D. .......................................... 255,095
Thomas Lemberg................................................ 895
Jerome Rubin.................................................. 6,007
PV Securities Corp. .......................................... 4,813
Philippe Villers.............................................. 4,814
Louis Hernandez, Jr........................................... 8,057
Steven Woit................................................... 2,984
Ronald Grigg.................................................. 7,325
</TABLE>
In March 1998, Dr. Rowe loaned RoweCom $100,000 payable on demand. The
Promissory Note accrued interest at the rate of 12% per annum compounded daily,
and was repaid in full (including $2,000 of accrued interest) on May 5, 1998.
Working Ventures, Axiom Venture Partners II Limited Partnership, Zero Stage
Capital VI, L.P., Crystal Internet Venture Fund, L.P., Highland Capital
Partners III Limited Partnership, and substantially all of the other
stockholders of RoweCom are entitled to certain registration rights with
respect to the common stock they will hold upon the consummation of this
offering. See "Description of Capital Stock--Registration Rights."
We believe that all of the transactions set forth above that were consummated
with parties that may be deemed to be affiliated with RoweCom were made on
terms no less favorable to us than could have been obtained from unaffiliated
third parties. All future transactions with parties that may be deemed to be
affiliated with RoweCom, including loans between RoweCom and its officers,
directors, principal stockholders and their affiliates, will be approved by a
majority of the board, including a majority of the independent and
disinterested outside directors on RoweCom's board of directors, and will
continue to be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
46
<PAGE>
Principal Stockholders
The following table sets forth certain information regarding beneficial
ownership of the common stock as of December 31, 1998 by:
. each person who is known by RoweCom to own beneficially more than five
percent of the outstanding common stock;
. each of RoweCom's directors and the Named Officers; and
. all current executive officers and directors of RoweCom as a group.
The table has been prepared on a pro forma basis assuming the:
. conversion of all outstanding shares of preferred stock into common
stock of RoweCom;
. exercise of all options that, by their terms, are exercisable within 60
days of December 31, 1998; shares subject to such options are deemed
outstanding for the purpose of computing the ownership percentage of the
person holding such options, but are not deemed outstanding for purposes
of computing the ownership percentage of any other person;
. exercise of all outstanding stock purchase warrants; and
. where indicated, the sale of 3,100,000 shares in this offering, assuming
no exercise of the underwriters' over-allotment option.
As used in this table, "beneficial ownership" means the sole or shared power to
vote or direct the voting or to dispose or direct the disposition of any common
stock.
<TABLE>
<CAPTION>
----------------------------------------
Shares Percentage of Common
Beneficially Stock Beneficially
Owned Owned
------------ ------------------------
Before After
Beneficial Owner Number Offering Offering
<S> <C> <C> <C>
Richard Rowe, Ph.D. ............... 1,491,848(1) 22.84% 15.49%
Working Ventures Canadian Fund
Inc............................... 1,543,822(2) 23.64% 16.03%
Highland Capital Partners III
Limited Partnership............... 1,084,574(3) 16.61% 11.26%
Crystal Internet Venture Fund,
L.P............................... 628,914(4) 9.63% 6.53%
Thomas Lemberg..................... 5,235(5) * *
Jerome Rubin....................... 11,617(6) * *
John Kennedy....................... 1,543,822(7) 23.64% 16.03%
Philippe Villers................... 91,204(8) 1.39% *
Louis Hernandez, Jr. .............. 65,245(9) * *
Steven Woit........................ 17,453(10) * *
Ronald Grigg....................... 34,111(11) * *
Stanley Fung....................... 205,459(12) 3.14% 2.13%
All executive officers and
directors as a group (12
persons).......................... 3,524,134(13) 52.38% 35.86%
</TABLE>
- --------
*Less than 1%.
(1)Does not include 255,095 shares that may be transferred to Dr. Rowe by
Working Ventures after consummation of this offering. If such transfer had
occurred as of December 31, 1998, the percentages of common stock beneficially
owned before and after the offering by Dr. Rowe would have been 26.75% and
18.14%, respectively. Dr. Rowe's address is c/o RoweCom, Inc., 725 Concord
Avenue, Cambridge, MA 02138.
(2)Consists entirely of shares issuable upon the conversion of 3,163,306 shares
of Class A-1 Preferred Stock, 1,186,240 shares of Class B Preferred Stock and
73,378 shares of Class C Preferred Stock into common stock upon consummation of
this offering. Includes 310,371 shares that may be transferred to various other
stockholders after the consummation of this offering. If such transfer had
occurred as of December 31, 1998, the percentage of common stock beneficially
owned before and after the offering would have been 18.89% and 12.81%,
respectively. See "Transactions Among Related Parties." The address for Working
Ventures is 250 Bloor Street East, Suite 1600, Toronto, Ontario M4W1E6.
(3)Consists entirely of shares issuable upon the conversion of 3,036,773 shares
of Class B Preferred Stock and 70,443 shares of Class C Preferred Stock owned
by Highland Capital Partners III Limited Partnership, and 126,532 shares of
Class B Preferred Stock and 2,935 shares of Class C Preferred Stock owned by
Highland Entrepreneurs' Fund III Limited Partnership, an affiliate of Highland
Capital Partners III Limited Partnership,
47
<PAGE>
into common stock upon consummation of this offering. The address for Highland
Capital Partners III Limited Partnership is Two International Place, Boston, MA
02110.
(4)Consists entirely of shares issuable upon the conversion of 1,581,654 shares
of Class B Preferred Stock and 220,135 shares of Class C Preferred Stock into
common stock upon consummation of this offering. The address for Crystal
Internet Venture Fund, L.P. is 1120 Chester Avenue, Cleveland, OH 44114.
(5)Includes 5,235 shares issuable upon the exercise of options that will become
exercisable within 60 days of December 31, 1998. Does not include 895 shares
that may be transferred to Mr. Lemberg by Working Ventures after the
consummation of this offering.
(6)Consists entirely of 6,382 shares issuable upon the net exercise of a stock
purchase warrant held by Mr. Rubin (assuming an initial public offering price
of $13 per share, the mid-point of the range set forth on the cover of this
prospectus), and 5,235 shares issuable upon the exercise of options that will
become exercisable within 60 days of December 31, 1998. Does not include 6,007
shares that may be transferred to Mr. Rubin by Working Ventures after
consummation of the offering. See "Transactions Among Related Parties."
(7)Consists entirely of shares beneficially owned by Working Ventures Canadian
Fund Inc. Mr. Kennedy is the representative of Working Ventures Canadian Fund
Inc. to RoweCom's board of directors and may be deemed to control the voting
and disposition of the common stock held by Working Ventures Canadian Fund Inc.
Mr. Kennedy disclaims beneficial ownership of the common stock held by Working
Ventures Canadian Fund Inc. Mr. Kennedy's address is c/o Working Ventures
Canadian Fund Inc., 250 Bloor Street East, Suite 1600, Toronto, Ontario M4W1E6.
See also note (2) above.
(8)Includes 45,602 shares held by PV Securities Corp., a Massachusetts
securities corporation of which Mr. Villers is the sole shareholder and 28,149
shares issuable upon the exercise of stock purchase warrants held by members of
Mr. Villers' immediate family or trusts for the benefit of such persons. Does
not include 9,627 shares that may be transferred to Mr. Villers or PV
Securities Corp. by Working Ventures after the consummation of this offering.
If such transfer had occurred as of December 31, 1998, the percentage of common
stock beneficially owned before and after the offering would have been 1.54%
and 1.04% respectively. See "Transactions Among Related Parties."
(9)Includes 65,245 shares issuable upon the exercise of options that will
become exercisable within 60 days of December 31, 1998. Does not include 8,057
shares that may be transferred to Mr. Hernandez by Working Ventures after the
consummation of this offering. If such transfer had occurred as of December 31,
1998, the percentage of common stock beneficially owned before and after the
offering would have been 1.11% and 0.76%, respectively. See "Transactions Among
Related Parties."
(10)Includes 17,453 shares issuable upon the exercise of options that will
become exercisable within 60 days of December 31, 1998. Does not include 2,984
shares that may be transferred to Mr. Woit by Working Ventures after the
consummation of this offering.
(11)Includes 17,452 shares issuable upon the exercise of options that will
become exercisable within 60 days of December 31, 1998. Does not include 7,325
shares that may be transferred to Mr. Grigg by Working Ventures after the
consummation of this offering. See "Transactions Among Related Parties."
(12) Consists entirely of shares beneficially owned by Zero Stage Capital VI
L.P. Mr. Fung is managing director of Zero Stage Capital VI L.P. and may be
deemed to control the voting and disposition of the common stock held by Zero
Stage Capital VI L.P. Mr. Fung disclaims beneficial ownership of the common
stock held by Zero Stage Capital VI L.P. Mr. Fung's address is c/o Zero Stage
Capital VI L.P., 101 Main Street, Cambridge, MA 02142.
(13)Includes 197,467 shares issuable upon the exercise of options that will
become exercisable within 60 days of December 31, 1998.
48
<PAGE>
Description of Capital Stock
Upon the closing of this offering, the authorized capital stock of RoweCom will
consist of 34,000,000 shares of common stock, $.01 par value per share, and
23,000,000 shares of preferred stock, $.01 par value per share, whose rights
and designation have not yet been established. There will be no preferred stock
outstanding immediately after the closing of this offering. The description in
the sections below of RoweCom's certificate of incorporation and by-laws refers
to RoweCom's Third Amended and Restated Certificate of Incorporation and
Amended and Restated By-Laws, respectively, as they will be in effect upon the
closing of this offering.
Common Stock
As of December 31, 1998, there were 1,526,180 shares of common stock
outstanding and held by five stockholders. These numbers reflect certain
transactions that will take place prior to the closing of this offering. These
transactions are described previously in the section entitled "Transactions
Among Related Parties." They are as follows:
. The conversion of all preferred stock of RoweCom and RoweCom Canada that
are outstanding prior to this offering into RoweCom common stock.
. The exercise of all outstanding preferred stock purchase warrants. The
price that the holders of the warrants must pay to obtain their shares,
the "exercise price," may in some cases not be paid in cash. Instead, we
will take the number of shares that the holder would otherwise have
received and deduct from that the number of shares that is equal in
value, based on the offering price of the common shares, to the "exercise
price."
Based upon the number of shares of common stock outstanding as of December 31,
1998 and giving effect to the issuance of the 3,100,000 shares of common stock
offered by this prospectus and the exercise of all outstanding stock purchase
warrants, assuming the underwriters do not exercise their over-allotment
option, there will be 9,630,416 shares of common stock outstanding upon the
closing of this offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders, and are not able to multiply the
number of shares they own by the number of directors up for election for
purpose of electing directors. Accordingly, holders of a majority of the shares
of common stock entitled to vote in any election of directors may elect all of
the directors standing for election. Holders of common stock are entitled to
receive dividends in proportion to the number of shares they hold, if they are
declared by RoweCom's board of directors out of funds that are legally
available for that purpose, provided that dividends declared on outstanding
preferred stock shall have priority. Upon the liquidation, dissolution or
winding up of RoweCom, the holders of common stock are entitled to receive the
net assets of RoweCom available after the payment of all debts and other
liabilities, provided that holders of the outstanding preferred stock shall
have priority. Holders of the common stock have no preferential right to
participate in any future debt or equity offerings, right to have their shares
redeemed or right to convert their shares into any other type of security. The
outstanding shares of common stock are, and the shares offered by RoweCom in
this offering will be, when issued and paid for, fully paid and non-assessable.
In the event RoweCom issues shares of preferred stock in the future, the rights
of the holders of RoweCom's common stock may be adversely affected by that
issuance. This is because it is probable that any preferred stock issued will
have certain rights and preferences that entitle the holders of such shares to
have priority over the holders of the common stock with respect to certain
matters. These matters include the right to receive dividends and the right to
receive the assets of RoweCom in the event of a bankruptcy or similar type
event. There will be no shares of preferred stock outstanding immediately after
the closing of this offering.
Preferred Stock
Under RoweCom's certificate of incorporation, RoweCom's board of directors is
authorized, subject to certain limitations prescribed by law, without further
stockholder approval, from time to time to issue up to an aggregate of
23,000,000 shares of preferred stock. The preferred stock may be issued in one
or more series. Each series may have different rights, preferences and
designations and qualifications, limitations and restrictions that may be
established by RoweCom's board of directors without approval from the
shareholders. These rights, designations and preferences include:
.number of shares to be issued;
.dividend rights;
49
<PAGE>
. dividend rates;
. right to convert the preferred shares into a different type of security;
. voting rights attributable to the preferred shares;
. right to set aside a certain amount of assets for payments relating to the
preferred shares; and
. prices to be paid upon redemption of the preferred shares or a
bankruptcy type event.
If RoweCom's board of directors decides to issue any preferred stock, it could
have the effect of delaying or preventing another party from taking control of
RoweCom. This is because the terms of the preferred stock would be designed to
make it prohibitively expensive for any unwanted third party to make a bid for
the shares of RoweCom. We have has no present plans to issue any shares of
preferred stock.
Delaware Law and Certain Charter and By-Law Provisions
RoweCom is subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a certain period of time. That period is
three years after the date of the transaction in which the person became an
interested stockholder, unless the interested stockholder attained that status
with the approval of the board of directors or unless the business combination
is approved in a prescribed manner. A "business combination" includes certain
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns, or owned within three years prior, 15% or more of the
corporation's voting stock.
RoweCom's certificate of incorporation and by-laws provide for the division of
the board of directors into three classes, as nearly equal in size as possible,
with each class beginning its three year term in a different year. See
"Management--Executive Officers and Directors." Any director may be removed
only for cause by the vote of a majority of the shares that are permitted to
vote for the election of directors.
RoweCom's by-laws provide that for nominations to its board of directors or for
other business to be properly brought by a stockholder before a meeting of
stockholders, the stockholder must first have given timely notice of the matter
in writing to RoweCom's Secretary. To be timely, a notice of nominations or
other business to be brought before an annual meeting must be delivered (x)
between 120 and 150 days before the date that is the one year anniversary of
the date of the preceding year's proxy statement relating to the annual
meeting; or (y) if the date of the current year's annual meeting is more than
30 days before or 60 days after the anniversary date described in (x) or no
proxy statement was delivered in the preceding year, then notice must be given
no earlier than 90 days before the meeting and no later than (1) 60 days before
the meeting or (2) 10 days after the date on which a public announcement that
relates the date of the annual meeting is made, whichever is later. With
respect to special meetings, notice must generally be delivered not more than
90 days prior to such meeting and not later than the later of 60 days prior to
such meeting or 10 days following the day on which public announcement of such
meeting is first made by RoweCom. The notice must contain, among other things,
certain information about the stockholder delivering the notice and, as
applicable, background information about each nominee or a description of the
proposed business to be brought before the meeting.
RoweCom's certificate of incorporation empowers its board of directors, when
considering a tender offer or merger or acquisition proposal, to take into
account factors in addition to potential economic benefits to stockholders.
These factors may include:
. comparison of the proposed consideration to be received by stockholders
in relation to the then current market price of RoweCom's capital stock,
the estimated current value of RoweCom in a freely negotiated transaction
and the estimated future value of RoweCom as an independent entity and
. the impact of a transaction on the employees, suppliers and clients of
RoweCom and its effect on the communities in which RoweCom operates.
The provisions described above could make it more difficult for a third party
to acquire control of RoweCom and, furthermore, could discourage a third party
from making any attempt to acquire control of RoweCom.
50
<PAGE>
RoweCom's certificate of incorporation provides that any action required or
permitted to be taken by the stockholders of RoweCom may be taken only at duly
called annual or special meeting of the stockholders, and that special meetings
may be called only by the Chairman of the board of directors of RoweCom, a
majority of the board of directors of RoweCom or the President of RoweCom,
except that holders of a majority of the common stock entitled to vote on the
election of directors may call a special meeting for the purpose of filling a
vacancy on the board of directors, and holders of at least two-thirds of the
common stock entitled to vote generally may call a special meeting for any
other purpose. These provisions could have the effect of delaying until the
next annual stockholders meeting stockholder actions that are favored by the
holders of a majority of the outstanding voting securities of RoweCom. These
provisions may also discourage another person or entity from making an offer to
RoweCom stockholders for the common stock. This is because the person or entity
making the offer, even if it acquired a majority of the outstanding voting
securities of RoweCom, would be unable to call a special meeting of the
stockholders and would further be unable to obtain unanimous written consent of
the stockholders. As a result, any meeting as to matters they endorse,
including the election of new directors or the approval of a merger, would have
to wait for the next duly called stockholders meeting.
The Delaware General Corporation Law provides that the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless the corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. RoweCom's certificate of incorporation requires the affirmative
vote of the holders of at least 67% of the outstanding voting stock of RoweCom
to amend or repeal any of the provisions of RoweCom's certificate of
incorporation described above, or to reduce the number of authorized shares of
common stock and preferred stock. The 67% vote is also required to amend or
repeal any of RoweCom's by-law provisions described above. The RoweCom by-laws
may also be amended or repealed by unanimous vote of RoweCom's board of
directors. The 67% stockholder vote would be in addition to any separate vote
that each class of preferred stock is entitled to that might in the future be
required in accordance with the terms of any preferred stock that might be
outstanding at the time any amendments are submitted to stockholders.
Registration Rights
RoweCom is party to a Second Amended and Restated Registration Rights
Agreement, dated as of December 11, 1998, with substantially all of its
stockholders, including Working Ventures Canadian Fund Inc., Axiom Venture
Partners II Limited Partnership, Zero Stage Capital VI, L.P., Highland Capital
Partners III Limited Partnership and Crystal Internet Venture Fund, L.P. In
accordance with the Registration Rights Agreement, RoweCom has granted these
stockholders, who will hold in the aggregate 5,599,705 shares of common stock
upon the completion of this offering, the following rights:
. The right to demand, upon four occasions, that their shares of common
stock be registered under the Securities Act of 1933, as amended, in a
manner similar to the registration of the shares that are offered by this
prospectus. They may make this request after the earlier of (x) January 31,
2003 or (y) six months after RoweCom's initial public offering.
. The right to have their shares of capital stock of RoweCom included in
any registration of common stock by RoweCom under the Securities Act, other
than those effected on Forms S-4 or S-8. In addition, RoweCom has agreed to
file registration statements on Form S-3 registering common stock for
resale by these stockholders, subject to certain limitations, upon the
request of the holders of certain percentages of common stock.
RoweCom is required to bear the expenses of the first twelve registrations and
all registrations described in the first sentence of the second bullet point
above conducted by RoweCom in accordance with the Registration Rights
Agreement. Stockholders of RoweCom who will hold in the aggregate 5,599,705
shares of common stock upon completion of this offering have agreed not to
exercise any registration rights during the 180 day period beginning on the
date of this prospectus.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is BankBoston, N.A.
51
<PAGE>
Underwriting
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom J.P. Morgan Securities Inc., CIBC Oppenheimer Corp. and Volpe Brown Whelan
& Company, LLC, are acting as representatives, have severally agreed to
purchase, and RoweCom has agreed to sell to them, the respective number of
shares of common stock set forth opposite their names below.
<TABLE>
<CAPTION>
----------------
Number of Shares
Underwriters ----------------
<S> <C>
J.P. Morgan Securities Inc. ...............................
CIBC Oppenheimer Corp. ....................................
Volpe Brown Whelan & Company, LLC..........................
---------
Total.................................................... 3,100,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase shares of common stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. Under the
terms and conditions of the underwriting agreement, all of the underwriters are
obligated to take and pay for all such shares of common stock, if any are
taken.
The underwriters propose initially to offer the shares of common stock directly
to the public at the public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The underwriters may allow, and such dealers may reallow,
a concession not in excess of $ per share to certain other dealers. After
the initial public offering of the common stock, the offering price and other
selling terms may be changed from time to time by the Underwriters.
According to the terms of the underwriting agreement, RoweCom has granted to
the underwriters an option, exercisable for 30 days from the date hereof, to
purchase up to 465,000 additional shares of common stock, on the same terms and
conditions as set forth on the cover page hereof. If such option is exercised
in full, the total price to the public, underwriting discounts and commissions,
and proceeds to RoweCom will be $ , $ and $ , respectively. The
underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with the sale of shares of common stock offered hereby. To
the extent that option is exercised, each of the underwriters will have a
commitment, subject to certain conditions, to purchase approximately the same
percentage of those additional shares as the number of shares of common stock
to be purchased by it as shown in the table above bears to the total number of
shares of common stock initially offered hereby.
RoweCom and certain of its stockholders, option holders, warrant holders,
officers and directors have agreed that during the period beginning on the date
of this prospectus and continuing to and including the date 180 days after the
date of this prospectus they will not (1) offer, pledge, announce the intention
to sell, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or
52
<PAGE>
warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities of RoweCom which are
substantially similar to the common stock, including but not limited to any
securities that are convertible into or exercisable or exchangeable for, or
that represent the right to receive common stock or any such substantially
similar securities or (2) enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, any of the economic consequences
of ownership of common stock or any securities substantially similar to the
common stock (other than, in the case of RoweCom, (x) pursuant to employee
stock option plans existing on, or upon the conversion or exchange of
convertible or exchangeable securities outstanding as of, the date of this
prospectus and (y) the issuance of common stock in connection with the
transactions described in this prospectus), without the prior written consent
of J.P. Morgan Securities Inc.
RoweCom has agreed to indemnify the underwriters against specified liabilities,
losses and expenses, including liabilities under the Securities Act, or to
contribute to payments that the underwriters may be required to make in
connection with such liabilities.
In connection with this offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over-allot in connection with this offering,
creating a syndicate short position. In addition, the underwriters may bid for,
and purchase, shares of common stock in the open market to cover syndicate
short positions or to stabilize the price of the common stock. Finally, the
underwriting syndicate may reclaim selling concessions allowed for distributing
the common stock in this offering, if the syndicate repurchases previously
distributed common stock in syndicate covering transactions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain
the market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.
Prior to this offering, there has been no public market for the common stock.
The initial public offering price for the shares of common stock offered hereby
has been determined by agreement between RoweCom and the underwriters. Among
the factors considered in making such determination were the history of and the
prospects for the industry in which RoweCom competes, an assessment of
RoweCom's management, the present operations of RoweCom, the historical results
of RoweCom and the trend of its revenues and earnings, the prospects for future
earnings of RoweCom, the general condition of the securities markets at the
time of this offering and the prices of similar securities of generally
comparable companies. There can be no assurance that an active trading market
will develop for the common stock or that the common stock will trade in the
public market at or above the initial public offering price.
It is expected that delivery of the shares sold in this offering will be made
to investors on or about , 1999.
The underwriters have reserved for sale up to 310,000 shares of common stock
for directors and employees of RoweCom, existing stockholders of RoweCom and
selected strategic business partners who have expressed an interest in
purchasing such shares of common stock in this offering. The underwriters have
advised RoweCom that the price per share for such shares will be the initial
public offering price. The number of shares available for sale to the general
public in this offering will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares not so purchased will be offered by
the underwriters to the general public on the same basis as the other shares
offered by this prospectus.
53
<PAGE>
Shares Eligible For Future Sale
Upon completion of this offering, we will have outstanding 9,630,416 shares of
common stock assuming the exercise of all outstanding stock purchase warrants
but no exercise of the underwriters' over-allotment option and no exercise of
outstanding options under RoweCom's stock incentive plans or other agreements.
Of these shares, the 3,100,000 shares sold in this offering will be freely
transferable without restriction or further registration under the Securities
Act, except for any shares held by an existing "affiliate" of RoweCom, as such
term is defined by Rule 144 under the Securities Act. The remaining 6,530,416
shares, and any shares purchased by affiliates in this offering, will be
"restricted shares" as defined in Rule 144.
In addition, substantially all of the optionholders, warrantholders and
stockholders of RoweCom, and all officers and directors of RoweCom, have agreed
under written "lock-up" agreements not to sell any shares of common stock for
180 days after the date of this prospectus without the prior written consent of
J.P. Morgan Securities Inc. See "Underwriting."
In general, under Rule 144 as currently in effect, beginning 90 days after this
offering, a person (or persons whose shares are aggregated) who owns shares
that were purchased from RoweCom or any affiliate at least one year previously,
including a person who may be deemed an affiliate of RoweCom, is entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:
. 1% of the then outstanding shares of the common stock which will equal
approximately 9,630 shares immediately after the completion of this
offering or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange
Commission.
Sales under Rule 144 must be made with the required notice and the availability
of current public information about RoweCom.
Any person, or persons whose shares are aggregated, who is not deemed to have
been an affiliate of RoweCom at any time during the 90 days preceding a sale,
and who owns shares within the definition of "restricted securities" under Rule
144 under the Securities Act that were purchased from RoweCom or any affiliate
at least two years previously, would be entitled to sell such shares under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
public information requirements, or notice requirements.
Rule 701 may be relied upon with respect to the resale of securities originally
purchased from RoweCom by its employees, directors, officers, consultants or
advisers prior to this offering. In addition, the Commission has indicated that
Rule 701 will apply to the typical stock options granted by an issuer before it
becomes a public company, along with the shares acquired upon exercise of such
options (including exercises after the date of this prospectus). Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning 90 days after the date of
this prospectus, may be sold by:
. persons other than affiliates, in ordinary brokerage transactions; and
. by affiliates under Rule 144 without compliance with its one-year
holding period requirement.
As a result of the foregoing regulations, beginning 90 days after the closing
of this offering, we expect that 31,748 shares of common stock will be eligible
for resale without restriction under Rule 144(k) or Rule 701, all of which
shares are subject to lock-up agreements. In addition, upon the expiration of
the lock-up agreements 180 days after the date of this prospectus, an
additional 4,869,567 shares of common stock, including 4,139,367 shares of
common stock held by affiliates of RoweCom, will become eligible for sale under
Rule 144, subject to the volume and other limitations of such rule. The
remaining 1,629,101 shares of common stock will be eligible for sale under Rule
144 on the first anniversary of their respective dates of issuance, beginning
on December 11, 1999.
RoweCom has agreed not to offer, sell or otherwise dispose of any shares of
common stock or any securities convertible into or exercisable or exchangeable
for common stock or any rights to acquire common stock for a period of 180 days
after the date of this prospectus, without the prior written consent of the
Representatives of the Underwriters, subject to certain limited exceptions. See
"Underwriting."
54
<PAGE>
After the completion of this offering, the holders of 5,599,705 shares of
common stock or their transferees would be entitled to have their shares
registered under the Securities Act. See "Description of Capital Stock--
Registration Rights." Registration of such shares under the Securities Act
would cause such shares to be freely tradable without restriction under the
Securities Act, except for shares purchased by Affiliates, immediately upon the
effectiveness of such registration, which could result in some of such shares
becoming eligible for sale in advance of the dates set forth above.
In addition, RoweCom intends to file one or more registration statements under
the Securities Act covering approximately 114,618 shares of common stock
reserved for issuance under the 1997 Plan, 872,625 shares reserved for issuance
under the Amended 1998 Plan, 872,625 shares reserved for issuance under the
1999 Employee Stock Purchase Plan, 87,263 shares reserved for issuance under
the Director Option Plan, and 71,556 options granted outside of such plans. See
"Management--Stock Incentive Plans." Such registration statements are expected
to be filed within 90 days after the date of this prospectus and will
automatically become effective upon filing. Following such filing, shares
registered under such registration statements will, subject to the 180-day
lock-up agreements described above and Rule 144 volume limitations applicable
to Affiliates, be available for sale in the open market upon the exercise of
vested options 90 days after the effective date of this prospectus. At December
31, 1998, options to purchase an aggregate of 602,966 shares were issued and
outstanding under the 1997 Plan, the 1998 Amended Plan, and the options issued
and outstanding outside of such plans.
Legal Matters
The validity of the common stock offered in this prospectus will be passed upon
for RoweCom by Bingham Dana LLP, Boston, Massachusetts. Certain legal matters
in connection with the offering will be passed upon for the underwriters by
Davis Polk & Wardwell, New York, New York.
Experts
The consolidated balance sheets as of December 31, 1997 and 1998, and the
consolidated statements of operations, stockholders' (deficit) equity and cash
flows for each of the three years in the period ended December 31, 1998,
included in this prospectus and the Registration Statement of which this
prospectus is a part have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
Available Information
We have filed with the Commission a registration statement on Form S-1 with
respect to the common stock being offered by this prospectus. This prospectus
does not contain all of the information set forth in the registration
statement. For further information about us and the common stock, see the
registration statement, and its exhibits. Descriptions in this prospectus of
any contract or other document are not necessarily complete and, where the
contract or document is an exhibit to the registration statement, any such
description is qualified in all respects by the exhibit. Copies of the
registration statement, including exhibits, may be examined without charge in
the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W. Room 1024, Washington, DC 20549, and the Securities and
Exchange Commission's Regional Offices located at 500 West Madison Street,
Suite 1400, Chicago, IL 60601, and 7 World Trade Center, 13th Floor, New York,
NY 10048 or on the Internet at http://www.sec.gov. You can get information
about the operation of the Public Reference Room by calling the Securities and
Exchange Commission at 1-800-SEC-0300. Copies of all or a portion of the
registration statement can be obtained from the Public Reference Section of the
Securities and Exchange Commission upon payment of prescribed fees.
As a result of this offering, RoweCom will become subject to the information
and reporting requirements of the Securities Exchange Act of 1934 and will be
required to file periodic reports, proxy statements and other information with
the Securities and Exchange Commission.
55
<PAGE>
ROWECOM INC.
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets at December 31, 1997 and 1998 ................ F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998...................................................... F-4
Consolidated Statements of Stockholders' (Deficit) Equity for the years
ended December 31, 1996, 1997 and 1998................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of RoweCom Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' (deficit) equity and cash
flows present fairly, in all material respects, the financial position of
RoweCom Inc. and its subsidiary at December 31, 1997 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles. 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 generally accepted auditing standards 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
Boston, Massachusetts
January 15, 1999 (Except for the information presented in Notes 12 and 15 for
which the date is February 8, 1999)
F-2
<PAGE>
RoweCom Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
----------------------------------------
Pro Forma
At December 31, at December 31,
----------------------- ---------------
1997 1998 1998
---------- ----------- ---------------
(Note 1)
(unaudited)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents........... $ 691,358 $16,050,826 $16,250,826
Accounts receivable (net of
allowance for doubtful accounts of
$0 and $60,000).................... 254,256 1,981,530 1,981,530
Restricted cash..................... 588,499 922,851 922,851
Other current assets................ 229,254 604,523 604,523
---------- ----------- -----------
Total current assets.............. 1,763,367 19,559,730 19,759,730
Equipment and furnishings, net........ 235,386 632,155 632,155
Deferred tax asset.................... 81,730 76,477 76,477
Other assets, net..................... 27,558 16,023 16,023
---------- ----------- -----------
Total assets...................... $2,108,041 $20,284,385 $20,484,385
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY:
Current liabilities:
Accounts payable.................... 166,013 365,853 365,853
Accrued expenses.................... 582,330 810,633 810,633
Accrued compensation................ 114,896 355,780 355,780
Customer advances................... 588,499 922,851 922,851
Income taxes payable................ 126,321 -- --
Loans payable....................... -- 1,657,719 1,657,719
---------- ----------- -----------
Total current liabilities......... 1,578,059 4,112,836 4,112,836
Commitments (Note 9)
Class A Redeemable, Convertible
Preferred stock, $.01 par value,
5,000,000 shares authorized,
1,772,857 shares issued and
outstanding and 0 shares issued and
outstanding on a pro forma basis
(liquidation value of $4,920,758).... 4,298,210 4,636,533 --
Class B Redeemable, Convertible
Preferred stock, $.01 par value,
8,000,000 shares authorized,
6,326,610 shares issued and
outstanding and 0 shares issued and
outstanding on a pro forma basis
(liquidation value of $8,367,101).... -- 8,198,016 --
Class C Redeemable, Convertible
Preferred Stock, $.01 par value,
5,000,000 shares authorized;
4,586,599 shares issued and
outstanding and 0 shares issued and
outstanding on a pro forma basis
(liquidation value of $15,683,252)... -- 15,588,268 --
Stockholders' (deficit) equity:
Common stock, $.01 par value per
share, 34,000,000 shares
authorized; 1,544,140 shares issued
and outstanding at December 31,
1997; 1,526,180 shares issued and
outstanding at December 31, 1998
and 6,530,416 shares issued and
outstanding on a pro forma basis... 15,441 15,261 65,304
Additional paid-in capital.......... 1,709,249 1,709,742 30,282,516
Treasury stock, at cost............. -- (53,267) (53,267)
Accumulated deficit................. (5,509,613) (13,901,240) (13,901,240)
Cumulative translation adjustment... 16,695 (21,764) (21,764)
---------- ----------- -----------
Total stockholders' (deficit)
equity........................... (3,768,228) (12,251,268) 16,371,549
---------- ----------- -----------
Total liabilities and
stockholders' (deficit) equity... $2,108,041 $20,284,385 $20,484,385
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
RoweCom Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
-------------------------------------
Year Ended December 31,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues................................ $ 3,116,454 $12,889,988 $19,052,639
Cost of revenues........................ 3,082,763 12,701,290 18,735,846
----------- ----------- -----------
Gross profit......................... 33,691 188,698 316,793
Operating expenses:
Sales and marketing.................... 584,602 2,034,331 4,817,402
Research and development............... 532,488 584,081 1,631,052
General and administrative............. 351,246 751,107 1,560,882
----------- ----------- -----------
Total operating expenses.............. 1,468,336 3,369,519 8,009,336
----------- ----------- -----------
Loss from operations................. (1,434,645) (3,180,821) (7,692,543)
Interest and other income, net......... 617 63,652 172,051
----------- ----------- -----------
Loss before income taxes............. (1,434,028) (3,117,169) (7,520,492)
Provision for income taxes............. 15,695 136,352 109,000
----------- ----------- -----------
Net loss............................. (1,449,723) (3,253,521) (7,629,492)
=========== =========== ===========
Accretion of dividends on redeemable
preferred stock....................... -- (183,584) (762,135)
----------- ----------- -----------
Net loss to common stockholders...... $(1,449,723) $(3,437,105) $(8,391,627)
=========== =========== ===========
Pro forma (unaudited):
Basic and diluted pro forma net loss
per share (Notes 1 and 2) ............ $ (1.87)
Weighted average shares used in
computing basic and diluted pro forma
net loss per share (Notes 1 and 2).... 4,077,075
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
RoweCom Inc.
Consolidated Statements of Stockholders' (Deficit) Equity
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Common Additional Treasury Cumulative
Stock Common Paid-In Stock at Accumulated Translation Comprehensive
Shares Stock Capital Cost Deficit Adjustment Total Loss
------ -------- ---------- -------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 7,679 $ 77 $ 674,700 -- $ (622,792) -- $ 51,985
Capital contributions
to Rowe
Communications, Inc... -- -- 839,913 -- -- -- 839,913
Issuance of common
stock in connection
with the foundation of
RoweCom LLC, July 1,
1996.................. 1,544,140 15,441 194,559 -- -- -- 210,000
Net loss............... -- -- -- -- (1,449,723) -- (1,449,723) $ (1,449,723)
Cumulative translation
adjustment............ -- -- -- -- -- $ 9,584 9,584 9,584
------------
Comprehensive loss..... -- -- -- -- -- -- -- $ (1,440,139)
--------- -------- ---------- -------- ------------ -------- ------------- ============
Balance, December 31,
1996................... 1,551,819 15,518 1,709,172 -- (2,072,515) 9,584 (338,241)
Shares cancelled upon
dissolution of Rowe
Communications, Inc... (7,679) (77) 77 -- -- -- --
Accretion of dividends
on preferred stock to
redemption value...... -- -- -- -- (183,577) -- (183,577)
Net loss............... -- -- -- -- (3,253,521) -- (3,253,521) $ (3,253,521)
Cumulative translation
adjustment............ -- -- -- -- -- 7,111 7,111 7,111
------------
Comprehensive loss..... -- -- -- -- -- -- -- $ (3,246,410)
--------- -------- ---------- -------- ------------ -------- ------------- ============
Balance, December 31,
1997................... 1,544,140 15,441 1,709,249 -- (5,509,613) 16,695 (3,768,228)
Accretion of dividends
on preferred stock to
redemption value...... -- -- -- -- (762,135) -- (762,135)
Exercise of stock
options............... 698 7 493 -- -- -- 500
Purchase of treasury
stock shares.......... (18,658) (187) -- $(53,267) -- -- (53,454)
Net loss............... -- -- -- -- (7,629,492) -- (7,629,492) $ (7,629,492)
Cumulative translation
adjustment............ -- -- -- -- -- (38,459) (38,459) (38,459)
------------
Comprehensive loss..... -- -- -- -- -- -- -- $ (7,667,951)
--------- -------- ---------- -------- ------------ -------- ------------- ============
Balance, December 31,
1998................... 1,526,180 $ 15,261 $1,709,742 $(53,267) $(13,901,240) $(21,764) $(12,251,268)
========= ======== ========== ======== ============ ======== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
RoweCom Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
--------------------------------------
Years Ended December 31,
--------------------------------------
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. $(1,449,723) $(3,253,521) $ (7,629,492)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 49,660 79,476 211,738
Loss on disposal of intangibles..... -- 29,033 --
Changes in operating assets and
liabilities:
Accounts receivable................. (26,155) (228,101) (1,731,677)
Other current assets................ (41,945) (158,631) (371,957)
Accounts payable.................... 80,339 23,373 202,067
Income taxes payable................ -- 126,321 (121,302)
Accrued expenses and accrued
compensation....................... 197,165 478,744 481,624
----------- ----------- ------------
Net cash used in operating
activities......................... (1,190,659) (2,903,306) (8,958,999)
Cash flows from investing activities:
Purchase of equipment and
furnishings......................... (56,329) (203,173) (595,887)
Purchase of intangible assets........ (34,840) (25,531) (1,000)
----------- ----------- ------------
Net cash used in investing
activities.......................... (91,169) (228,704) (596,887)
Cash flows from financing activities:
Net proceeds from issuance of
preferred stock..................... -- 3,712,464 23,362,472
Proceeds from issuance of common
stock............................... 210,000 -- 500
Loan proceeds........................ 210,000 127,638 2,507,719
Loan repayments...................... -- (37,638) (850,000)
Capital contribution................. 839,913 -- --
Purchase of treasury stock........... -- -- (53,454)
----------- ----------- ------------
Net cash provided by financing
activities......................... 1,259,913 3,802,464 24,967,237
Effect of exchange rates on cash..... 9,584 7,111 (51,883)
Net (decrease) increase in cash and
cash equivalents.................... (12,331) 677,565 15,359,468
Cash and cash equivalents, beginning of
period................................ 26,124 13,793 691,358
----------- ----------- ------------
Cash and cash equivalents, end of
period................................ $ 13,793 $ 691,358 $ 16,050,826
=========== =========== ============
Supplementary information:
Conversion of loan payable into
preferred stock..................... -- $ 300,000 --
Accretion of preferred stock......... -- $ 183,577 $ 762,135
Income taxes paid.................... $ 15,286 -- $ 211,058
Interest paid........................ $ -- $ 9,820 $ 19,356
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
RoweCom Inc.
Notes To Consolidated Financial Statements
1. Summary of Significant Accounting Policies
RoweCom Inc. ("RoweCom"), was formed as Rosewood Knowledge Management, Inc. on
January 12, 1994, and was renamed as Rowe Communications, Inc. on February 16,
1995, to provide Internet-based knowledge acquisition and management services.
RoweCom's principal product is the knowledgeStore (the "kStore"). The kStore
allows knowledge workers, librarians, and purchasing agents to order, pay for,
and manage the purchase of knowledge resources. RoweCom provides each client's
organization with its own highly customized "company store" which facilitates
the ordering, payment and management of subscriptions to magazines, newspapers
and journals as well as other knowledge resources electronically through
RoweCom's online catalog. The kStore allows ordering from a decentralized or
centralized environment, the inclusion of built-in approval levels, and the
automation of enterprise-wide reporting.
On July 1, 1996, Rowe Communications, Inc. transferred substantially all of its
assets and liabilities to RoweCom LLC in exchange for a 97% interest in RoweCom
LLC, which is a limited liability company formed under the laws of the State of
Delaware. On April 25, 1997, RoweCom LLC merged with RoweCom. The merger had no
significant impact on RoweCom's financial statement presentation. Rowe
Communications Ltd., a Canadian company ("RoweCom Canada"), is a subsidiary of
RoweCom. All significant intercompany accounts and transactions between RoweCom
and its sole subsidiary, RoweCom Canada, included in the accompanying
consolidated financial statements have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with
remaining maturities of three months or less from the date of purchase and
whose carrying amounts approximate fair value due to the short maturity of the
investments.
Revenues
Revenues are principally generated from subscription orders for third-party
publications, which include the cost of the subscription and the associated
transaction fee earned by RoweCom. RoweCom recognizes revenues from a
subscription order when the customer transmits an order.
Revenues for the setup of the kStore on customers' intranets are recognized
upon installation. Revenue earned from installations was immaterial for the
years ended 1996, 1997 and 1998. Revenues related to transaction fees paid by
third parties for transactions sourced from RoweCom's kStore site are
recognized when reported by the third-party.
Research and Development and Capitalized Software Costs
Costs incurred prior to the establishment of technological feasibility are
charged to research and development expense as incurred. Software production
costs incurred subsequent to the establishment of technological feasibility are
capitalized until the product or enhancement is available for general release
to customers. Amortization is based on the straight-line method over the
remaining estimated life of the product. Software production costs eligible for
capitalization have been immaterial.
Advertising Costs
RoweCom expenses advertising costs as incurred. Advertising expense for the
years ended 1996, 1997 and 1998 was $40,325, $227,183 and $244,806,
respectively.
Equipment and Furnishings
Equipment and furnishings are stated at cost, net of accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
lives of the related assets. Leasehold improvements are depreciated over the
shorter of the lease term or the estimated useful life. Upon retirement or
sale, the cost of the assets disposed of and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in the determination of net income or loss.
Other Current Assets
Included in other current assets at December 31, 1997 is $130,000 in advances
to publishers. There were no such amounts outstanding at December 31, 1998.
F-7
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
Other Assets
Other assets are recorded at cost and consist of trademark costs and a license
agreement. Trademark costs are being amortized over five years using the
straight-line method. The license agreement with Banc One Corporation for
processing services is being amortized over a thirty-one month period using the
straight-line method.
Foreign Currency Translation
The local currency for Rowe Communications, Ltd., the Canadian dollar, is the
functional currency of that company. The accounts of Rowe Communications Ltd.
are translated into U.S. dollars using exchange rates in effect at period-end
for assets and liabilities and at average exchange rates during the period for
results of operations. The related translation adjustments are reported as a
separate component of stockholders' equity. Gains and losses resulting from
foreign currency transactions have been immaterial for all periods presented
and are included in interest and other income, net.
Income Taxes
RoweCom accounts for income taxes under the liability method. Under this
method, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities using enacted tax rates in effect
in the years in which the differences are expected to reverse. The measurement
of deferred tax assets is reduced by a valuation allowance if, based on the
weight of available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized.
Prior to its merger into RoweCom on April 25, 1997, RoweCom LLC was a limited
liability company for which all U.S. income and losses flowed through to its
members and are, therefore, not available to offset future taxable income of
RoweCom.
Concentration of Credit Risk, Significant Customer Information and Segment
Information
Financial instruments which potentially expose RoweCom to concentrations of
credit risk consist primarily of trade accounts receivable. RoweCom performs
ongoing evaluations of customers' financial condition, in certain cases
requires advances from customers for future purchases and maintains reserves
for potential uncollectible amounts, which, in the aggregate, have not exceeded
management expectations. For the years ended December 31, 1997 and 1998, the
top three customers represented 23% and 21% of revenues, respectively. RoweCom
has adopted Statement of Financial Accounting Standard No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which requires
segment disclosure. RoweCom has determined that it conducts its operations in
one business segment.
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to provide estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of expense during the reporting period. Actual results
could differ from those estimates.
RoweCom has a limited operating history, has never achieved profitability and
is subject to the risks and uncertainties encountered by start-up companies
such as the uncertain nature of the markets in which RoweCom competes and the
risk that RoweCom may be unable to manage any future growth successfully.
In addition, RoweCom is subject to the risks encountered by companies relying
on the continued growth of online commerce and Internet infrastructure. The
risk includes the use of the Internet as a viable commercial marketplace and
the potentially inadequate development of the necessary network infrastructure.
One supplier provided 24% and 23% of knowledge resources sold by RoweCom for
the years ended December 31, 1997 and 1998, respectively. If this supplier were
to cease providing knowledge resources at favorable prices RoweCom may be
unable to offer competitive prices to its customers.
F-8
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
Finally, RoweCom has historically experienced season fluctuations in revenues.
This pattern may be expected to continue and results of financial operations
within any fiscal year cannot be expected to be representative.
Pro Forma Balance Sheet (Unaudited)
Upon the closing of RoweCom's initial public offering, all of the outstanding
shares of Class A, A-1, B and C redeemable convertible preferred stock and all
outstanding stock purchase warrants will automatically convert into 5,004,236
shares of RoweCom common stock. The unaudited pro forma presentation of the
balance sheet has been prepared assuming the conversion of the preferred stock
and the preferred stock warrants, into common stock as of December 31, 1998.
Pro Forma Net Loss Per Common Share (Unaudited)
The pro forma net loss per common share is computed based upon the weighted
average number of common shares and common equivalent shares (using the
treasury stock method) outstanding after certain adjustments described below.
Common equivalent shares are not included in the per share calculations where
the effect of their inclusion would be anti-dilutive. In the computation of pro
forma net loss per share, accretion of preferred stock to the mandatory
redemption amount is not included as an increase to net loss. Also, the pro
forma net loss per common share gives effect to the exchange of all outstanding
preferred stock of RoweCom Canada into preferred stock of RoweCom, the
mandatory conversion of all outstanding shares of preferred stock into shares
of common stock and the exercise of all outstanding stock purchase warrants.
2. Net Loss Per Common Share
The following is a calculation of net loss per share
<TABLE>
<CAPTION>
----------------------------------------
Year Ended December 31,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Historical
Basic and diluted:
Net loss to common stockholders.... $ (1,449,723) $ (3,437,105) $ (8,391,627)
Weighted average number of common
shares............................ 776,084 1,551,819 1,527,827
Net loss per common share-basic and
diluted........................... $ (1.87) $ (2.22) $ (5.49)
Pro forma (Unaudited)
Basic and diluted:
Net loss........................... $ (7,629,492)
Weighted average number of common
shares............................ 1,555,976
Weighted average assumed number of
shares upon conversion of
preferred stock and the net
exercise of all outstanding stock
purchase warrants................. 2,521,099
------------
Total weighted average number of
shares used in computing pro forma
net loss per share................ 4,077,075
Basic and diluted pro forma net
loss per common share............. $ (1.87)
</TABLE>
Options to purchase shares of RoweCom's common stock totaling 101,224 and
155,327 at December 31, 1996 and 1997, and 470,327 at December 31, 1998, and
preferred stock purchase warrants totaling 120,968 at December 31, 1997, and
1998 were outstanding but were not included in the computations of diluted
earnings per share as the inclusion of these shares would have been anti-
dilutive. No options were granted prior to 1996.
F-9
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
3. Restricted Cash
Restricted cash consists of funds advanced by customers for the future purchase
of publications. The amount has also been recorded as customer advances.
4. Equipment and Furnishings
The components of equipment and furnishings were as follows:
<TABLE>
<CAPTION>
--------------------------------
At December 31,
Useful Life --------------------
(Years) 1997 1998
----------- --------- ---------
<S> <C> <C> <C>
Computer equipment and software............... 3 $ 275,049 $ 669,442
Furniture and office equipment................ 5 60,986 195,638
Leasehold improvements........................ 1-2 -- 67,017
--------- ---------
336,035 932,097
Less: accumulated depreciation................ (100,649) (299,942)
--------- ---------
$ 235,386 $ 632,155
========= =========
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997, and 1998 was
$41,913, $56,528 and $199,293, respectively.
5. Other Assets
The components of other assets were as follows:
<TABLE>
<CAPTION>
------------------
At December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Trademarks.................................................. $ 28,541 $ 29,541
License agreement........................................... 40,000 40,000
-------- --------
68,541 69,541
Less accumulated amortization............................... (40,983) (53,518)
-------- --------
$ 27,558 $ 16,023
======== ========
</TABLE>
6. Income Taxes
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
-------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Current
Federal............................................. -- -- --
State............................................... -- -- $ 40,000
Foreign............................................. $15,695 $136,352 69,000
------- -------- --------
Total................................................. $15,695 $136,352 $109,000
======= ======== ========
</TABLE>
F-10
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
The following is a reconciliation between U.S. federal statutory rate and the
effective rate:
<TABLE>
<CAPTION>
---------------------------
Year ended December 31
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
U.S. federal statutory rate....................... (34.0)% (34.0)% (34.0)%
Foreign taxes..................................... 1.1 4.4 .5
State taxes, net of federal tax benefit........... -- -- 1.0
Net operating losses not benefited................ 34.0 % 34.0 % 34.0 %
------- ------- -------
1.1 % 4.4 % 1.5 %
</TABLE>
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
----------------------
1997 1998
--------- -----------
<S> <C> <C>
Net Operating Loss...................................... $ 238,000 $ 1,628,499
Stock Issuance Costs................................... 102,162 100,366
Reserves and Other..................................... -- 394,188
--------- -----------
Total................................................. 340,162 2,123,053
Valuation Allowance..................................... (238,000) (2,022,687)
--------- -----------
Net Deferred Tax Asset................................ $ 102,162 $ 100,366
========= ===========
</TABLE>
As of December 31, 1998, RoweCom has net operating losses for federal & state
income tax purposes of approximately $4,071,000 which begin to expire in 2012
and 2003, respectively. The difference between the statutory rate and the
effective tax rate is primarily attributed to the valuation allowance.
As required by Statement of Financial Accounting Standards No. 109, management
of RoweCom has evaluated the positive and negative evidence bearing upon the
realizability of its deferred tax assets, which are comprised principally of
intangible assets and net operating loss carryforwards. Management has
determined that it is more likely than not that RoweCom will not recognize the
benefits of the federal and state deferred tax assets and, as a result, a
valuation allowance of approximately $2,023,000 has been established at
December 31, 1998.
RoweCom has recognized a net deferred tax asset at December 31, 1997 and 1998
of $102,162 and $100,366, respectively, related to issuance costs of its Class
A and Class B Redeemable Convertible Preferred Stock. No valuation allowance
was recorded for the foreign net deferred tax assets since it is more likely
than not that these net deferred tax assets will be realized in the future.
Included in other current assets is $20,432 and $23,889 representing the
current portion of the net deferred tax asset of RoweCom at December 31, 1997
and 1998, respectively.
7. Loans Payable
RoweCom's loan payable of $200,000 outstanding at December 31, 1996 with a
third-party individual with an interest rate of 8%, compounded daily, was
converted to preferred shares and stock purchase warrants in 1997 (see note
12).
On June 19, 1998, RoweCom entered into an equipment loan agreement with a bank.
Under this loan agreement RoweCom may borrow up to $500,000, for the purpose of
acquisition of equipment, for a period of six months. In December 1998, the
outstanding balance of $320,369 was converted into a term loan, to be repaid in
thirty equal monthly installments. The interest on the outstanding balance is
calculated daily at the bank's prime rate (7.75% at December 31, 1998), plus
1.0%. The loan is collateralized by all RoweCom's assets, including accounts
receivable and equipment, but excluding intellectual property. RoweCom is
required to maintain certain financial ratios, including a "quick ratio" of
1.50 through December 31, 1998, and 1.10 thereafter. The loan agreement defines
"quick ratio" as the sum of consolidated cash and cash equivalents plus
consolidated eligible accounts receivable, divided by consolidated current
liabilities.
Effective September 23, 1998, RoweCom and the bank amended the agreement by
adding a revolving line of credit totaling $4,000,000. Outstanding principal is
due on the earlier of the 85th day after the date of each revolving loan, or
September 23, 1999. The interest rate on the outstanding balance is computed
daily at the
F-11
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
bank's prime rate plus 0.5%. At December 31, 1998, $1,337,350 was outstanding
under this line of credit. At December 31, 1998, the weighted average interest
rate on outstanding borrowing under this agreement was 8.35%.
8. Related Party Transactions
Included in accounts payable at December 31, 1996 was $1,701 for consulting
services rendered by members of the board of directors and $24,000 for legal
services rendered by a party related to a significant shareholder. The December
31, 1997 and December 31, 1998 accounts payable includes $313 and $0,
respectively, for legal services rendered by a party related to a principal
shareholder and total expense for December 31, 1997 and 1998 for these services
was $9,207 and $38,314, respectively.
9. Commitments
RoweCom leases office space in Cambridge, Massachusetts and London, Ontario
under operating lease agreements which expire on August 31, 2000 and April 30,
1999, respectively. Rent expense for the years ended December 31, 1996, 1997
and 1998 was $31,461, $108,000 and $217,234, respectively. RoweCom also leases
certain office equipment under operating leases expiring through 2001. Future
minimum lease payments are $273,058, $83,395 and $2,534 for 1999, 2000 and
2001, respectively.
10. Retirement Plan
RoweCom maintains a contributory 401(k) defined contribution plan (the "Plan")
to provide retirement benefits for principally all employees of RoweCom, as
defined. Under the terms of the Plan, participants may defer between 1% and 15%
of their compensation, a portion of which may be contributed on a pretax basis
as defined by law. RoweCom may also make discretionary contributions to the
Plan. Participants vest in employer contributions over a five-year period.
RoweCom did not make any contributions to the Plan during 1996, 1997 or 1998.
11. Stockholders' (Deficit) Equity
Common Stock
RoweCom has authorized 34,000,000 shares of common stock, $.01 par value.
Common stock has full voting rights. Dividend and liquidation rights of common
stock are subordinated to those of all classes of preferred stock.
12. Redeemable Convertible Preferred Stock
RoweCom
RoweCom has authorized 5,000,000 shares of Class A Redeemable Convertible
Preferred Stock, $.01 par value, of which 161,289 shares were issued and
outstanding at December 31, 1997 and December 31, 1998. RoweCom has authorized
5,000,000 shares of Class A-1 Redeemable Convertible Preferred Stock, $.01 par
value, of which none were issued and outstanding at December 31, 1997 and
December 31, 1998. RoweCom has authorized 8,000,000 shares of Class B
Redeemable Convertible Preferred Stock, $.01 par value, of which 5,140,370
shares were issued and outstanding at December 31, 1998, and 5,000,000 shares
of Class C Redeemable Convertible Preferred Stock, $.01 par value, of which
none were issued and outstanding at December 31, 1996 and 1997 and 4,586,599
shares were issued and outstanding at December 31, 1998.
In April 1997, the loan payable for $200,000 held by a third party at December
31, 1996 and an additional loan payable of $100,000 which was entered into in
1997 were converted into 161,289 shares of Class A.
In May 1998, RoweCom sold 5,140,370 shares of Class B at a price of $1.2645 per
share. Net proceeds to RoweCom, after deducting issuance costs, were
$6,372,678.
F-12
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
In December 1998, RoweCom sold 4,586,599 shares of Class C Preferred Stock at a
price of $3.407 per share. Net proceeds to RoweCom, after deducting issuance
costs, were $15,531,559.
The terms of Class A, Class A-1, Class B and Class C are as follows:
Conversion. Each share of Class A, Class A-1, Class B and Class C may be
converted into 0.34905 common shares at the option of the stockholder.
On February 8, 1999, the Second Amended and Restated Certificate of
Incorporation was amended to provide, among other things, that upon the
closing of an initial public offering of RoweCom's common stock in which
RoweCom has an equity valuation of at least $80,000,000, and results in
proceeds of at least $20,000,000 (a "Qualified IPO"), all outstanding
shares of Class A, Class A-1, Class B and Class C are automatically
converted into shares of common stock.
Dividend and Voting Rights. Holders of Class A, Class A-1, Class B and
Class C are entitled to fixed, preferential, cumulative dividends in the
amount of 6.75% per annum on the liquidation preference of $2.48, $1.2645,
$1.2645 and $3.407 for each Class A share, Class A-1 share, Class B share
and Class C share, respectively. When and if declared by RoweCom's board of
directors, dividends on Class A, Class A-1, Class B and Class C are payable
in cash or additional Class A, Class A-1, Class B and Class C shares in
preference and prior to any payment of any dividend on the common shares.
Dividends on Class C are payable in preference and prior to any other class
of shares and dividends on Class B are payable in preference and prior to
any dividends on Class A and Class A-1 shares. The determination of whether
a dividend is payable in cash or in additional shares is to be made at the
discretion of the board. Any dividend that is not declared by the board of
directors or paid in cash or additional preferred shares will accrue and
compound annually at a rate of 6.75%. Upon the consummation of a Qualified
IPO, any and all rights to accrued and unpaid dividends shall cease. The
holders of Class A, Class A-1, Class B and Class C are entitled to vote on
all matters and are entitled to the number of votes equal to the number of
common shares into which the Class A, Class A-1, Class B and Class C are
convertible as of the date of record.
Liquidation Preferences. In the event of any liquidation, dissolution or
winding up of RoweCom, the holders of Class A, Class A-1, Class B and Class
C are entitled to receive, prior to and in preference to any payment or
distribution of any assets or surplus funds of the Company to the holders
of the common shares, an amount for each Class A, Class A-1, Class B and
Class C share held, equal to $2.48, $1.2645, $1.2645 and $3.407,
respectively, plus in each case, any accrued and unpaid dividends on the
Class A, Class A-1, Class B and Class C shares, whether or not declared. If
upon such liquidation, the assets and funds thus distributed among the
holders of the preferred shares shall be insufficient to permit the payment
to such holders of the full liquidation preference, then the entire assets
and funds of RoweCom legally available for distribution shall be
distributed in the following order: (i) first, among the holders of Class C
shares, (ii) second, among the holders of Class B shares and (iii) third,
pro rata according to liquidation preference among the holders of Class A
and Class A-1, treated as a single class.
Redemption. Upon the earlier of the occurrence of certain events or May 5,
2003 and at any time thereafter, the holders of Class A will be entitled to
require RoweCom to redeem all of the Class A shares at a price of $2.48 per
share, plus all unpaid cumulative dividends, whether or not declared, which
have accrued thereon. The holders of Class A-1, Class B and Class C will
have the right to require the Company to purchase from the holders all of
the outstanding Class A-1, Class B and Class C shares on December 11, 2003
and at any time thereafter up until December 11, 2005. RoweCom must
purchase the Class A-1, Class B and Class C shares at a purchase price
equal to the greater of (i) the fair market value of such shares or (ii)
the respective liquidation preference plus all accrued but unpaid
dividends.
F-13
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
The following table sets forth preferred stock activity of RoweCom Inc.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Class A Class B Class C
Shares Class A Shares Class B Shares Class C Total
------- -------- --------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December
31, 1996.. -- -- -- -- -- -- --
------- -------- --------- ---------- --------- ----------- -----------
Conversion
of note
payable to
Class A
redeemable
convertible
preferred
stock..... 161,289 $300,000 -- -- -- -- $ 300,000
------- -------- --------- ---------- --------- ----------- -----------
Balance at
December
31, 1997.. 161,289 300,000 -- -- -- -- 300,000
Accretion
of Class A
redeemable
convertible
preferred
stock..... -- 47,555 -- -- -- -- 47,555
Issuance of
Class B
redeemable
convertible
preferred
stock, net
of
issuance
costs of
$127,320.. -- -- 5,140,370 $6,372,678 -- -- 6,372,678
Accretion
of Class B
redeemable
convertible
preferred
stock..... -- -- -- 298,145 -- -- 298,145
Issuance of
Class C
redeemable
convertible
preferred
stock, net
of
issuance
costs of
$94,984... -- -- -- -- 4,586,599 $15,531,559 15,531,559
Accretion
of Class C
redeemable
convertible
preferred
stock..... -- -- -- -- -- 56,709 56,709
------- -------- --------- ---------- --------- ----------- -----------
Balance at
December
31, 1998.. 161,289 $347,555 5,140,370 $6,670,823 4,586,599 $15,588,268 $22,606,646
======= ======== ========= ========== ========= =========== ===========
</TABLE>
Rowe Communications Ltd.
Rowe Communications Ltd. ("Ltd.") has an unlimited authorized number of its
Class A Redeemable Convertible Voting Preferred Stock ("Ltd. Class A") and an
unlimited authorized number of its Class B Redeemable Convertible Non-Voting
Preferred Stock ("Ltd. Class B").
In April 1997 Ltd. sold 1,611,568 shares of Ltd. Class A at $2.48 per share, in
a private offering to a Canadian venture capital firm. Net proceeds to Ltd.,
after deducting issuance costs, were $3,712,464. At December 31, 1997 and 1998,
1,611,568 shares of Ltd. Class A were issued and outstanding. These shares are
aggregated on the Company's balance sheet with the Class A shares.
In May 1998, Ltd. sold 1,186,240 shares of Ltd. Class B at $1.2645, in a second
private offering to a Canadian venture capital firm. Net proceeds to Ltd.,
after deducting issuance costs, were $1,458,235. At December 31, 1998,
1,186,240 shares of Ltd. Class B were issued and outstanding. These shares are
aggregated on the Company's balance sheet with the Class B shares.
Conversion. The holder of Ltd. Class A has the right (pursuant to the
RoweCom Second Amended and Restated Stockholders Agreement) at any time to
require RoweCom to issue 3,163,306 Class A-1 shares in the capital stock of
RoweCom, in exchange for such holder's Ltd. Class A shares (the "Class A
Exchange Option") plus any additional shares or assets (including
dividends, whether declared or accumulated) which the holder would have
acquired had the holder held such number of Class A-1 shares in the capital
stock of RoweCom. If the stockholder of Ltd. Class A has exercised the
Class A Exchange Option, the stockholder must transfer, for no additional
consideration, a total of 889,187 (subject to adjustments) Class A-1 shares
to certain existing stock, option and warrant holders of the Company upon
the occurrence of certain events. At December 31, 1998, approximately
150,000 of those Class A-1 shares would be transferred to existing holders
of stock options and warrants to purchase the Company's common stock. The
holder of Ltd. Class B has the right at any time to require RoweCom to
issue Class B shares, in exchange for such holders Ltd. Class B shares
(Class B Exchange Option) on a one for one basis plus any additional shares
or assets (including dividends, whether declared or accumulated) which the
holder would have acquired had the holder held the same number of Class B
shares in the capital stock of RoweCom.
F-14
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
Under an Exchange Option Exercise Agreement, the holder of the Ltd. Class A
Preferred Shares and the Ltd. Class B Preferred Shares irrevocably agrees
to exercise its Class A Exchange Option and Class B Exchange Option upon
the closing of an Initial Public Offering meeting certain conditions.
Dividend and Voting Rights. The holder of Ltd. Class A was entitled to
receive fixed, preferential, cumulative dividends in the amount of 6.75%
per annum on the liquidation preference of $2.48 for each Ltd. Class A
share from April 1997 through May 1998. In May 1998 and upon the closing of
the Ltd. Class B offering, the Articles of Incorporation of Ltd. were
amended such that the holder of Ltd. Class A and the holder of Ltd. Class B
are entitled to receive dividends as and when declared by the board of
directors. The holders of Ltd. Class B are not entitled to receive notice
of or to attend and vote at meetings of the shareholders of Ltd. except to
the extent that such holders are entitled to vote under the Business
Corporations Act (Ontario). The holders of Ltd. Class A Preferred Shares
shall be entitled to receive notice of and attend all meetings of the
shareholders of Ltd. and each Ltd. Class A Preferred Share shall confer the
right to one (1) vote.
Liquidation Preferences. In the event of any liquidation, dissolution or
winding up of Ltd., holders of Ltd. Class A and Ltd. Class B are entitled
to receive prior to and in preference to any payment or distribution of any
assets to the holders of the common shares, an amount for each Ltd. Class A
share and Ltd. Class B share held, equal to $2.48 and $1.2645, plus any
accrued and unpaid dividends on the Ltd. Class A and Ltd. Class B shares
declared.
Redemption. Upon the earlier of the occurrence of certain events or May 5,
2003 and at any time thereafter, the holders of Ltd. Class A and Ltd. Class
B may require RoweCom to redeem all of the Ltd. Class A and Ltd. Class B
shares at a price of $2.48 and $1.2645 per Ltd. Class A and Ltd. Class B
share, plus all accrued and unpaid cumulative dividends, declared.
The following table sets forth preferred stock activity of Rowe Communications
Ltd.
<TABLE>
<CAPTION>
----------------------------------------------------
Class A Class B
Shares Class A Shares Class B Total
--------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1996..................... -- -- -- -- --
--------- ---------- --------- ---------- ----------
Issuance of Class A
redeemable convertible
preferred stock, net of
issuance costs of
$284,225................. 1,611,568 $3,712,464 -- -- $3,712,464
Tax effect of issuance of
preferred stock.......... -- 102,169 -- -- 102,169
Accretion of Class A
redeemable convertible
preferred stock.......... -- 183,577 -- -- 183,577
--------- ---------- --------- ---------- ----------
Balance at December 31,
1997..................... 1,611,568 3,998,210 -- -- 3,998,210
Accretion of Class A
redeemable convertible
preferred stock.......... -- 290,768 -- -- 290,768
Issuance of Class B
redeemable convertible
preferred stock, net of
issuance costs of
$41,765.................. -- -- 1,186,240 $1,458,235 1,458,235
Accretion of Class B
redeemable convertible
preferred stock.......... -- -- -- 68,958 68,958
--------- ---------- --------- ---------- ----------
Balance at December 31,
1998..................... 1,611,568 $4,288,978 1,186,240 $1,527,193 $5,816,171
========= ========== ========= ========== ==========
</TABLE>
13. Stock Purchase Warrants
In connection with the issuance of Ltd. Class A (note 12) and the conversion of
the loans payable into 161,289 shares of Class A, 120,968 stock purchase
warrants of RoweCom were issued with an exercise price of $2.48 per share. The
class of stock purchasable under the stock purchase warrants is Ltd. Class A
Preferred. If prior
F-15
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
to the time of exercise, the warrant holder has exercised the Class A Exchange
Option, then the shares purchasable pursuant to the stock purchase warrant
shall be common stock of RoweCom. The value of the warrants was immaterial at
the time of issuance.
14. Stock Options
In 1996 as part of the initial formation and operating agreement of RoweCom and
prior to the inception of the 1997 Stock Incentive Plan, stock options were
issued to key employees and members of the board of directors. Vesting terms
range from immediate vesting to vesting at a rate of 20% per year. All options
expire ten years from RoweCom's date of formation. A total of 95,989 options
were issued in 1996 and an additional 69,810 were authorized for future grants.
On April 25, 1997, RoweCom adopted the 1997 Stock Incentive Plan for directors,
officers, employees, and consultants of RoweCom. A total of 114,618 shares of
common stock were reserved for issuance under the 1997 Stock Incentive Plan.
These options vest over a five-year period and expire over a period not
exceeding ten years.
On April 8, 1998, RoweCom adopted the 1998 Stock Incentive Plan. A total of
349,050 shares of common stock were reserved for issuance under the 1998 Stock
Incentive Plan. These options vest over a four year period and expire over a
period not exceeding ten years.
The board establishes the exercise price and vesting period at the time the
options are granted and specifies these terms in the applicable option
agreements.
Under the terms of the Plans, the exercise price of incentive stock options
granted must not be less than 100% (110% in certain cases) of the fair market
value of the common stock on the date of grant, as determined by the board of
directors. In reaching the determination of fair market value at the time of
each grant, the board of directors considers a broad range of factors including
the illiquid nature of an investment in RoweCom's common stock, RoweCom's
historical financial performance, and RoweCom's future prospects.
After assessing the fair value of the Company's common stock, the Board of
Directors, on July 9, 1998, determined that certain stock options held by
employees of the Company had an exercise price significantly higher than the
estimated fair value. As a result, such stock options were not providing the
desired incentive to the employees, and such employees were then provided the
opportunity to replace their existing options with new options, on a one for
one basis, at a price of $0.72 per share, with no change in their original
vesting schedule. This stock option repricing resulted in new options to
purchase 385,144 shares of common stock. At the execution of the stock option
repricing, the fair value of the Company's common stock was $0.72 per share and
therefore no compensation charge was recorded.
Transactions during 1996, 1997 and 1998 related to stock options granted by
RoweCom were as follows:
<TABLE>
<CAPTION>
------------------------
Weighted
Average
Shares Exercise Price
-------- --------------
<S> <C> <C>
Outstanding at January 1, 1996
Granted.............................................. 118,677 $ 2.00
Exercised............................................ -- --
Forfeited/canceled................................... (17,452) 1.43
--------
Outstanding at December 31, 1996....................... 101,225 1.75
Granted.............................................. 57,593 2.55
Exercised............................................ -- --
Forfeited/canceled................................... (3,490) 2.86
--------
Outstanding at December 31, 1997....................... 155,328 2.03
Granted.............................................. 819,198 2.09
Exercised............................................ (698) .72
Forfeited/canceled................................... (503,500) 2.72
--------
Outstanding at December 31, 1998....................... 470,328 $ 1.17
========
</TABLE>
F-16
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
At December 31, 1996, 1997 and 1998, 31,414, 69,228, and 66,994 options were
exercisable at exercise prices ranging from $0.72 to $2.86 and at December 31,
1998 64,896 were available for grant.
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ .72 350,873 8.7 $ .72 34,416 $ .72
1.43 43,631 2.4 1.43 30,833 1.43
2.86 64,829 9.7 2.86 1,745 2.86
5.01 10,995 9.8 5.01 --
------- ------
470,328 8.3 years $1.17 66,994 $1.09
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" (SFAS No. 123), encourages but does not require companies
to record compensation cost for stock-based employee contribution plans at fair
value. RoweCom has chosen to account for stock-based employee compensation
using the intrinsic value method prescribed under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, no compensation expense has been recognized for
its stock-based compensation plan.
Had compensation cost for RoweCom's stock option plans been determined based on
the estimated fair value of the option at the date of grant for awards in 1996,
1997 and 1998 using the minimum value method consistent with SFAS No. 123, the
adjustment to net loss would have been immaterial. The weighted average fair
values of options granted are $0.52, $1.03, and $0.80, respectively. For this
purpose, the fair value of options at the date of grant was estimated using the
minimum value method with the following weighted-average assumptions: risk-free
interest rates of 6.57%, 6.58%, and 5.40%; no dividend yields; no volatility
factors; and a weighted-average expected life of the options of eight years.
15. Stock Split
On February 8, 1999, the board of directors declared a .34905-for-1 reverse
stock split of the RoweCom's common stock, to be effective upon the filing of
the Third Restated Certificate of Incorporation of RoweCom. All references to
the number of common shares and per share amounts in the consolidated financial
statements and related footnotes have been restated to reflect the effect of
the reverse stock split for all periods presented.
F-17
<PAGE>
[ROWECOM LOGO APPEARS HERE]
<PAGE>
Part II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
Expenses of the Registrant in connection with the issuance and distribution of
the securities being registered, other than the underwriting discount, are
estimated as follows:
<TABLE>
<CAPTION>
---------
Total(1)*
---------
<S> <C>
SEC Registration Fee............................................. $ 13,900
NASD Fees........................................................ $ 5,500
NASDAQ Listing Fees.............................................. $ 76,000
Printing and Engraving Expenses.................................. $150,000
Legal Fees and Expenses.......................................... $300,000
Accountants' Fees and Expenses................................... $300,000
Expenses of Qualification Under State Securities Laws, Including
Attorneys' Fees................................................. $ 5,000
Transfer Agent and Registrar's Fees.............................. $ 10,000
Miscellaneous Costs.............................................. $ 39,600
--------
Total.......................................................... $900,000
========
</TABLE>
*To be provided by amendment.
(1)Amounts are estimated as of , 1999.
Item 14. Indemnification of Directors, Officers and Employees
Section 145 of the Delaware General Corporation law empowers a Delaware
corporation to indemnify its officers and directors and certain other persons
to the extent and under the circumstances set forth therein.
The form of the Third Amended and Restated Certificate of Incorporation of the
Registrant and the Amended and Restated By-laws of the Registrant, copies of
the forms of which are filed as Exhibits 3.1 and 3.2, provide for
indemnification of officers and directors of the Registrant and certain other
persons against liabilities and expenses incurred by any of them in certain
stated proceedings and under certain stated conditions.
The above discussion of the Registrant's Third Amended and Restated Certificate
of Incorporation, Amended and Restated By-Laws and Section 145 of the Delaware
General Corporation Law is not intended to be exhaustive and is qualified in
its entirety by the forms of such Third Amended and Restated Certificate of
Incorporation, Amended and Restated By-Laws, and statute.
The Registrant will agree to indemnify the Underwriters and their controlling
persons, and the Underwriters will agree to indemnify the Registrant and its
controlling persons, including directors and executive officers of the
Registrant, against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of the Underwriting Agreement
that will be filed as part of the Exhibits hereto.
For information regarding the Registrant's undertaking to submit to
adjudication the issue of indemnification for violation of the securities laws,
see Item 17 hereof.
Item 15. Recent Sales of Unregistered Securities
On April 1, 1997, Working Ventures Canadian Fund Inc. acquired 1,611,568 shares
of Class A Preferred Stock of Rowe Communications Ltd. ("RoweCom Canada") and
an option to exchange such shares of RoweCom Canada Class A Preferred Stock for
shares of common stock of the Registrant (the "Exchange Option") for an
aggregate offering of $4,000,000. No underwriting discounts or commissions were
paid by the Company in connection therewith. The Exchange Option was issued in
reliance on the exemption under the Securities Act of 1933, as amended,
provided by Regulation S thereunder.
On April 1, 1997, RoweCom issued 80,645 shares of the Registrant's Class A
Preferred Stock to Philippe Villers in exchange for the cancellation of
indebtedness of the Registrant to Mr. Villers, and 40,322 shares of Class A
Preferred Stock to Mr. Jerome Rubin in exchange for the cancellation of
indebtedness of the Registrant
II-1
<PAGE>
to Mr. Rubin. In connection with the issuance of these shares of Class A
Preferred Stock of the Registrant, the Registrant issued stock purchase
warrants to each of Messrs. Villers and Rubin providing for the purchase of up
to 28,149 shares of the Registrant's capital stock in the case of the warrant
issued to Mr. Villers, and up to 14,074 shares of the Registrant's capital
stock in the case of the stock purchase warrant issued to Mr. Rubin. These
shares of Class A Preferred Stock and the stock purchase warrants were issued
in reliance on the exemptions from registration under the Securities Act
provided by Regulation D thereunder.
On May 4, 1998, Crystal Internet Venture Fund, L.P., Highland Capital Partners
III Limited Partnership, Highland Entrepreneurs' Fund III Limited Partnership,
Pai, Wei Ming Chung, Fu Kuan Investment Corp., and Puretech Profits Limited
(BVI) purchased an aggregate of 5,140,370 shares of the Class B Preferred Stock
of the Registrant for an aggregate purchase price of $6,500,000, and Working
Ventures acquired 1,186,240 shares of the Class B Preferred Stock of RoweCom
Canada and an option to exchange such shares of RoweCom Canada Class B
Preferred Stock for shares of Class B Preferred Stock of the Registrant for an
aggregate purchase price of $1,500,000. The sales made by the Registrant to
Crystal Internet Venture Fund, L.P., Highland Capital Partners III Limited
Partnership and Highland Entrepreneurs' Fund III Limited Partnership were made
in reliance upon the exemption from registration under the Securities Act
provided by Regulation D thereunder. The sales made by the Registrant to Pai,
Wei Ming Chung, Fu Kuan Investment Corp. and Puretech Profits Limited (BVI)
were made in reliance upon the exemption from registration under the Securities
Act provided by Regulation S thereunder.
On May 4, 1998, in connection with the sale of the Registrant's Class B
Preferred Stock, the Exchange Option was amended to permit Working Ventures to
exchange its shares of RoweCom Canada Class A Preferred Stock for an increased
number of shares of the Class A-1 Preferred Stock of the Registrant. The sale
of the option to exchange such stock for additional shares of Class A-1
Preferred Stock of the Registrant was made in reliance on the exemption from
registration under the Securities Act provided by Regulation S thereunder.
II-2
<PAGE>
On December 15, 1998, the Registrant sold an aggregate of 4,586,599 shares of
its Class C Preferred Stock for an aggregate purchase price, net of expenses,
of approximately $15,500,000 to the following persons under the following
exemptions from registration under the Securities Act:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Purchaser Exemption
---------------------------------------------------------------------------
<S> <C>
Axiom Venture Partners II Limited Partnership............... Regulation D
Azalea Mall, L.L.C. ........................................ Regulation D
Zero Stage Capital VI, L.P. ................................ Regulation D
Winfield Capital Corp. ..................................... Regulation D
Telantis Venture Partners V, Inc. .......................... Regulation D
Moore Global Investments, Ltd. ............................. Regulation D
Remington Investments Strategies, L.P. ..................... Regulation D
Crystal Internet Venture Fund, L.P. ........................ Regulation D
Highland Capital Partners III Limited Partnership........... Regulation D
Highland Entrepenuers' Fund III Limited Partnership......... Regulation D
Working Ventures Canadian Fund.............................. Regulation S
Michael Loeb................................................ Regulation D
Solstice Capital Limited Partnership........................ Regulation D
Trident Pacific Investment.................................. Regulation S
China First Steel Ropes Mfg. Co., Ltd. ..................... Regulation S
Central Investment Holdings (BVI) Co., Ltd. ................ Regulation S
Taiwan Asia Pacific Venture Fund Limited.................... Regulation S
Chen, Chau Ho............................................... Regulation S
Puretech Profits Limited, BVI............................... Regulation S
Safety Investment Corp. .................................... Regulation S
Te Hua Hsu.................................................. Regulation S
Jan Yin..................................................... Regulation S
UOB Venture Technology Investments Ltd. .................... Regulation S
UOB Venture Investments II Ltd. ............................ Regulation S
Wei Ming Yuan............................................... Regulation S
Sonny Wang.................................................. Regulation S
Barndhaw Investments Inc. .................................. Regulation S
Sunny Lin................................................... Regulation S
Lip-Bu Tan and Ysa Loo Trust................................ Regulation S
Philippe Villers............................................ Regulation D
PV Securities Corp. ........................................ Regulation D
Art Bauernfiend............................................. Regulation D
PaineWebber, Custodian F/B/O Alan B. Kennedy................ Regulation D
Antoine Hadamard, M.D. ..................................... Regulation D
Robert Zevin................................................ Regulation D
Barry Bloom, M.D. .......................................... Regulation D
Casimir Shrzypczak.......................................... Regulation D
ZAFA LLC.................................................... Regulation D
Jonathan Nadler............................................. Regulation D
</TABLE>
As of December 31, 1998, the Registrant had issued options to purchase an
aggregate of 113,554 shares of common stock under the Registrant's 1997 Stock
Incentive Plan, the Amended and Restated 1998 Stock Incentive Plan and options
issued and outstanding outside of such plans. The Registrant has also issued an
aggregate of 698 shares of common stock to an employee upon the exercise of
options granted pursuant to the Registrant's 1997 Stock Incentive Plan for an
aggregate consideration of $500, at an average exercise price of $.72 per
share. These grants of options, and the sales of common stock upon the exercise
of these options, were made in reliance on the exemptions from registration
under the Securities Act provided by Rule 701 thereunder.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) The following is a list of exhibits filed as a part of this registration
statement:
Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
3.1 Form of Third Amended and Restated Certificate of Incorporation
of the Registrant.
3.2 Form of Amended and Restated By-Laws of the Registrant.
4.1 Specimen Certificate for shares of the Registrant's Common
Stock.
5.1 Opinion of Bingham Dana LLP, counsel to the Registrant,
regarding the legality of the shares of Common Stock.
10.1 1997 Stock Incentive Plan of the Registrant
10.2 1999 Non-Employee Director Stock Option Plan
10.3 1999 Employee Stock Purchase Plan
10.4 Amended and Restated 1998 Stock Incentive Plan
*10.5 Lease of 725 Concord Ave., Cambridge, Massachusetts, dated as of
August 30, 1996, between David E. Clem and David M. Roby,
Trustees of Lyme Properties Realty Trust u/d/t dated September
30, 1994 and the Registrant, as amended by First Addendum to
Lease, dated August 20, 1997, among David E. Clem and David M
Roby, Trustees of Lyme Properties Realty Trust u/d/t, Curtin
Insurance Agency, Inc. and the Registrant.
*10.6 Consent to Cross Assignment of Leases, dated August 1, 1998,
between David E. Clem and David M. Roby, Trustees of Lyme
Properties Realty Trust u/d/t dated September 30, 1994 and the
Registrant.
*10.7 Stock Purchase Agreement, dated May 4, 1998, between the
Registrant, Rowe Communications Ltd. ("RoweCom Canada"), and the
Purchasers named therein, relating to the sale by the Registrant
of its Class B Convertible Preferred Stock.
*10.8 Share Purchase Agreement, dated as of April 1, 1997, between the
Registrant and the Purchasers named therein relating to the sale
by the Registrant of shares of its Class A Convertible Preferred
Stock.
*10.9 Second Amended and Restated Stockholders' Agreement, dated as of
December 11, 1998, by and among the Registrant and certain
stockholders of the Registrant.
*10.10 Stock Purchase Agreement, dated as of December 11, 1998, between
the Registrant and the Purchasers named therein, relating to the
sale by the Registrant of shares of Class C Preferred Stock.
*10.11 Second Amended Registration Rights Agreement, dated as of
December 11, 1998, by and among the Registrant, RoweCom Canada,
and the Purchasers named therein.
*10.12 Executive Employment Agreement, dated as of November 4, 1998
between the Registrant and Mr. Louis Hernandez.
*10.13 Loan Agreement, dated June 19, 1998, between Imperial Bank and
the Registrant, as amended by Amendment No. 1 to the Loan
Agreement, dated September 23, 1998, between the Registrant and
Imperial Bank.
*10.14 General Security Agreement, dated June 19, 1998, between
Imperial Bank and the Registrant.
*10.15 Form of Non-Competition Agreements by and between the Registrant
and each of Richard Rowe, Ph.D., Louis Hernandez, Stephen
Vozella, Walter Crosby, Steven Woit and Ronald Grigg.(/1/)
+*10.16 Electronic Commerce Referral and Revenue Sharing Agreement,
dated August 24, 1998, by and between Intelisys Electronic
Commerce LLC and the Registrant.
+*10.17 Marketing and Integration Agreement, dated as of August 20,
1998, by and between barnesandnoble.com llc and the Registrant.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
+*10.18 Content and Co-Marketing Agreement, dated September 28, 1998 by
and between the Registrant and NewSub Services, Inc.
+*10.19 Content and Co-Marketing Agreement, dated October 23, 1998 between
the Registrant and Publications Resource Group, Inc.
*10.20 Stock Purchase Warrant between Philippe Villers and the
Registrant.
*10.21 Stock Purchase Warrant between Jerome Rubin and the Registrant.
*10.22 Exchange Option Agreement, dated as of February 3, 1999, between
the Registrant and Working Ventures.
*21.1 Subsidiary of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2 Consent of Bingham Dana LLP, counsel to the Registrant (included
in Exhibit 5.1).
*27.1 Financial Data Schedule.
*99.1 Consent of Veronis Suhler & Associates, Inc.
*99.2 Consent of International Data Corporation.
*99.3 Power of Attorney.
</TABLE>
(1)Each of the Non-Competition Agreements is identical in all respects, except
as described in the prospectus.
*Previously filed.
+Confidential treatment requested.
Schedules
Schedule II Valuation and Qualifying Accounts
Except for the financial statement schedule listed above, all other schedules
have been omitted because either they are not required, are not applicable or
the information is otherwise set forth in the Consolidated Financial Statements
and notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 hereof, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes:
(1) To provide the Underwriter at the closing specified in the Underwriting
Agreement certificates in such denominations and registered in such names
as required by the Underwriter to permit prompt delivery to each purchaser.
(2) That for purposes of determining any liability under the Securities Act
of 1933, 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.
(3) That for the purpose of determining any liability under the Securities
Act of 1933, 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>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant,
RoweCom Inc., has duly caused this Amendment No. 2 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cambridge, Commonwealth of Massachusetts, on this
third day of March 1999.
ROWECOM INC.
/s/ Richard Rowe
By: _________________________________
Richard Rowe
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment No.
2 to the Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard Rowe Chairman of the Board of March 3, 1999
______________________________________ Directors, President,
Richard Rowe Chief Executive Officer
and Director (principal
executive officer)
/s/ Louis Hernandez, Jr.* Executive Vice President March 3, 1999
______________________________________ and Chief Financial
Louis Hernandez, Jr. Officer (principal
financial and accounting
officer)
/s/ Stanley Fung* Director March 3, 1999
______________________________________
Stanley Fung
/s/ Thomas Lemberg* Director March 3, 1999
______________________________________
Thomas Lemberg
/s/ Jerome Rubin* Director March 3, 1999
______________________________________
Jerome Rubin
/s/ Philippe Villers* Director March 3, 1999
______________________________________
Philippe Villers
/s/ John Kennedy* Director March 3, 1999
______________________________________
John Kennedy
</TABLE>
/s/ Richard Rowe
*By: ____________________________
Richard Rowe
Attorney-in-Fact
II-6
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charge to Balance at
beginning of year Costs and Expenses Deductions End of Year
----------------- ------------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1996:
Accounts receivable
reserve................ $-- -- -- (a) $ --
Year Ended December 31,
1997:
Accounts receivable
reserve................ $-- -- -- (a) $ --
Year Ended December 31,
1998:
Accounts receivable
reserve................ $-- 60,000 -- (a) $60,000
</TABLE>
- --------
(a)Specific write-offs
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of RoweCom Inc.:
Our audits of the consolidated financial statements referred to in our report
dated January 15, 1999 (except for Notes 12 and 15 for which the date is
February 8, 1999) of RoweCom Inc. also included an audit of the financial
statement schedule listed in Item 16(a) herein. In our opinion, the financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 15, 1999
S-2
<PAGE>
EXHIBIT INDEX
Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
*1.1 Proposed Form of Underwriting Agreement.
3.1 Form of Third Amended and Restated Certificate of Incorporation
of the Registrant.
3.2 Form of Amended and Restated By-Laws of the Registrant.
4.1 Specimen Certificate for shares of the Registrant's Common
Stock.
5.1 Opinion of Bingham Dana LLP, counsel to the Registrant,
regarding the legality of the shares of Common Stock.
10.1 1997 Stock Incentive Plan of the Registrant
10.2 1999 Non-Employee Director Stock Option Plan
10.3 1999 Employee Stock Purchase Plan
10.4 Amended and Restated 1998 Stock Incentive Plan
*10.5 Lease of 725 Concord Ave., Cambridge, Massachusetts, dated as of
August 30, 1996, between David E. Clem and David M. Roby,
Trustees of Lyme Properties Realty Trust u/d/t dated September
30, 1994 and the Registrant, as amended by First Addendum to
Lease, dated August 20, 1997, among David E. Clem and David M
Roby, Trustees of Lyme Properties Realty Trust u/d/t, Curtin
Insurance Agency, Inc. and the Registrant.
*10.6 Consent to Cross Assignment of Leases, dated August 1, 1998,
between David E. Clem and David M. Roby, Trustees of Lyme
Properties Realty Trust u/d/t dated September 30, 1994 and the
Registrant.
*10.7 Stock Purchase Agreement, dated May 4, 1998, between the
Registrant, Rowe Communications Ltd. ("RoweCom Canada"), and the
Purchasers named therein, relating to the sale by the Registrant
of its Class B Convertible Preferred Stock.
*10.8 Share Purchase Agreement, dated as of April 1, 1997, between the
Registrant and the Purchasers named therein relating to the sale
by the Registrant of shares of its Class A Convertible Preferred
Stock.
*10.9 Second Amended and Restated Stockholders' Agreement, dated as of
December 11, 1998, by and among the Registrant and certain
stockholders of the Registrant.
*10.10 Stock Purchase Agreement, dated as of December 11, 1998, between
the Registrant and the Purchasers named therein, relating to the
sale by the Registrant of shares of Class C Preferred Stock.
*10.11 Second Amended Registration Rights Agreement, dated as of
December 11, 1998, by and among the Registrant, RoweCom Canada,
and the Purchasers named therein.
*10.12 Executive Employment Agreement, dated as of November 4, 1998
between the Registrant and Mr. Louis Hernandez.
*10.13 Loan Agreement, dated June 19, 1998, between Imperial Bank and
the Registrant, as amended by Amendment No. 1 to the Loan
Agreement dated September 23, 1998 between the Registrant and
Imperial Bank.
*10.14 General Security Agreement, dated June 19, 1998, between
Imperial Bank and the Registrant.
*10.15 Form of Non-Competition Agreements by and between the Registrant
and each of Richard Rowe, Ph.D., Louis Hernandez, Stephen
Vozella, Walter Crosby, Steven Woit and Ronald Grigg.(/1/)
+*10.16 Electronic Commerce Referral and Revenue Sharing Agreement,
dated August 24, 1998, by and between Intelisys Electronic
Commerce LLC and the Registrant.
+*10.17 Marketing and Integration Agreement, dated as of August 20,
1998, by and between barnesandnoble.com llc and the Registrant.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
+*10.18 Content and Co-Marketing Agreement, dated September 28, 1998 by
and between the Registrant and NewSub Services, Inc.
+*10.19 Content and Co-Marketing Agreement, dated October 23, 1998
between the Registrant and Publications Resource Group, Inc.
*10.20 Stock Purchase Warrant between Philippe Villers and the
Registrant.
*10.21 Stock Purchase Warrant between Jerome Rubin and the Registrant.
*10.22 Exchange Option Agreement, dated as of February 3, 1999, between
the Registrant and Working Ventures.
*21.1 Subsidiary of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2 Consent of Bingham Dana LLP, counsel to the Registrant (included
in Exhibit 5.1).
*27.1 Financial Data Schedule.
*99.1 Consent of Veronis, Suhler & Associates Inc.
*99.2 Consent of International Data Corporation.
*99.3 Power of Attorney.
</TABLE>
(1)Each of the Non-Competition Agreements is identical in all respects, except
as described in the prospectus.
*Previously filed with the Securities and Exchange Commission.
+Confidential treatment requested.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF THIRD RESTATED AND AMENDED
CERTIFICATE OF INCORPORATION
of
RoweCom Inc.
RoweCom Inc. (hereinafter called the "Corporation"), organized and existing
under and by virtue of the General Corporation Law of the State of Delaware (the
"DGCL"), does hereby certify as follows:
The original Certificate of Incorporation was filed on April 24, 1997. The
Amended and Restated Certificate of Incorporation and the Second Amended and
Restated Certificate of Incorporation were filed on May 4, 1998 and December 11,
1998, respectively. The Third Amended and Restated Certificate of Incorporation
was duly adopted in accordance with Sections 242 and 245 of the General
Corporation Law of the State of Delaware ("DGCL").
By written action of the board of directors of the Corporation, a
resolution was duly adopted, pursuant to Sections 141, 242 and 245 of the DGCL,
setting forth a restatement and amendment to the Second Restated and Amended
Certificate of Incorporation, as previously amended and restated and then in
effect, of the Corporation and declaring said restatement and amendment to be
advisable. The stockholders of the Corporation duly approved this proposed
restatement and amendment by written consent in accordance with Sections 228,
242 and 245 of the DGCL. The Third Restated and Amended Certificate of
Incorporation is attached hereto as Exhibit A.
IN WITNESS WHEREOF, the Corporation has caused this Third Restated and
Amended Certificate of to be signed by its President on this sixth day of
February, 1999.
ROWECOM INC.
By: /s/ Richard Rowe
___________________________
Its: President and CEO
__________________________
<PAGE>
Exhibit A
------- -
THIRD RESTATED AND AMENDED
CERTIFICATE OF INCORPORATION
of
RoweCom Inc.
ARTICLE I
The name of this corporation (the "Corporation") is:
RoweCom Inc.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is Corporation Service Company, 1013 Centre Road, in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is Corporation Service Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the DGCL.
ARTICLE IV
The total number of shares of capital stock that the Corporation is
authorized to issue is 57,000,000 shares, $0.01 par value per share, consisting
of 34,000,000 shares of Common Stock ("Common Shares"), 5,000,000 shares of
Class A Preferred Stock ("Class A Preferred Shares"), 5,000,000 shares of Class
A-1 Preferred Stock ("Class A-1 Preferred Shares"), 8,000,000 shares of Class B
Preferred Stock ("Class B Preferred Shares") and 5,000,000 shares of
<PAGE>
-2-
Class C Preferred Stock ("Class C Preferred Shares"; and together with the Class
A Preferred Shares, the Class A-1 Preferred Shares and the Class B Preferred
Shares, the "Preferred Shares").
Shares of undesignated Preferred Stock may be issued from time to time
in one or more series, each of such series to have such powers, designations,
preferences, and relative, participating, optional, and other special rights, if
any, and such qualifications, limitations, and restrictions thereof, if any, as
are stated or expressed herein or in the resolution or resolutions of the Board
of Directors of the Corporation (the "Board of Directors") providing for such
series of Preferred Stock. Different series of Preferred Stock shall not be
construed to constitute different classes of shares for the purposes of voting
by classes unless expressly so provided herein or in such resolution or
resolutions.
Authority is hereby granted to the Board of Directors from time to
time to issue undesignated Preferred Stock in one or more series, and in
connection with the creation of any such series, by resolution or resolutions to
determine and fix the powers, designations, preferences, and relative,
participating, optional, and other rights, if any, and the qualifications,
limitations, and restrictions thereof, if any, including without limitation
dividend rights, conversion rights, voting rights (if any), redemption
privileges, and liquidation preferences, of such series of Preferred Stock
(which need not be uniform among series), all to the fullest extent now or
hereafter permitted by the General Corporation Law of Delaware. Without
limiting the generality of the foregoing, the resolution or resolutions
providing for the creation or issuance of any series of Preferred Stock may
provide that such series shall be superior to, rank equally with, or be junior
to any other series of Preferred Stock, all to the fullest extent permitted by
law. No resolution, vote, or consent of the holders of the capital stock of the
Corporation shall be required in connection with the creation or issuance of any
shares of any series of Preferred Stock authorized by and complying with the
conditions of this Third Amended and Restated Certificate of Incorporation, the
right to any such resolution, vote, or consent being expressly waived by all
present and future holders of the capital stock of the Corporation.
At such time as no Preferred Shares are issued and outstanding,
whether because all of such shares have been converted into shares of Common
Stock in accordance with this Third Amended and Restated Certificate of
Incorporation, or otherwise, all authorized Preferred Shares, automatically and
without further action, shall be reclassified as authorized but unissued shares
of undesignated Preferred Stock of no particular class or series, and any and
all of such shares of undesignated Preferred Stock may thereafter be issued by
the Board of Directors in one or more series, and the terms of any and each such
series may be determined by the Board of Directors, as provided herein.
Upon the filing of this Third Restated and Amended Certificate of
Incorporation, each share of Common Stock that is issued and outstanding or held
in the Corporation's treasury immediately prior to such filing will be
<PAGE>
-3-
combined into and reclassified as, and will become, 0.34905 duly authorized,
validly issued, fully paid, and non-assessable shares of Common Stock. Until
surrendered, the certificates formerly representing the shares of Common Stock
that have been combined and reclassified in accordance with the foregoing will
represent the shares of Common Stock that they have been combined into and
reclassified as in accordance with the foregoing.
ARTICLE V
The rights, preferences, privileges and restrictions granted to or imposed
upon the Common Shares and the Preferred Shares are as follows:
A. Dividends.
---------
(1) (a) With respect to each Class C Preferred Share, commencing on
the date that such Class C Preferred Share shall have been issued and (b) with
respect to each Class A Preferred Share, Class A-1 Preferred Share or Class B
Preferred Share, commencing on the later of (i) the date of the initial issuance
of the Class B Preferred Shares or (ii) with respect to each Class A Preferred
Share, Class A-1 Preferred Share or Class B Preferred Share, respectively, the
date that such Preferred Share shall have been issued, the holders of such
Preferred Shares shall be entitled to a fixed, preferential, cumulative,
dividend in the amount of 6.75% per annum on the price of $2.48, $1.2645,
$1.2645 and $3.407 for each Class A Preferred Share, Class A-1 Preferred Share,
Class B Preferred Share and Class C Preferred Share, respectively, when and if
declared by the board of directors of the Corporation (the "Board of
Directors"). Dividends on such Preferred Shares shall be payable in cash or
additional Class A Preferred Shares, Class A-1 Preferred Shares, Class B
Preferred Shares or Class C Preferred Shares, as applicable, in preference and
prior to any payment of any dividend on the Common Shares. Dividends on the
Class C Preferred Shares shall be payable in preference and prior to any payment
of any dividend on the Class A Preferred Shares, the Class A-1 Preferred Shares
or the Class B Preferred Shares and dividends on the Class B Preferred Shares
shall be payable in preference and prior to any payment of any dividend on the
Class A Preferred Shares or the Class A-1 Preferred Shares. After the payment of
such dividends on such Preferred Shares, the holders of Common Shares and
Preferred Shares shall be entitled, when and if declared by the Board of
Directors, to dividends out of assets of the Corporation legally available
therefor, which dividends shall be payable to the holders of the Preferred
Shares (as if fully converted into Common Shares pursuant to Article VI) and the
holders of the Common Shares, on a per share basis. Any dividend that is not
declared by the Board of Directors or paid in cash or additional Preferred
Shares shall accrue and compound annually at a rate of 6.75% as provided herein.
(2) The determination of whether a dividend declared pursuant to
Section A(1) above shall be payable in cash or in additional shares shall be
<PAGE>
-4-
made in the discretion of the Board of Directors. At any time and from time to
time after the third anniversary of the initial issuance of the Class B
Preferred Shares, (a) the Investors (as defined in the Second Amended and
Restated Stockholders' Agreement dated December 11, 1998, by and among the
Corporation and the "Stockholder" parties thereto (as amended and in effect from
time to time, the "Second Amended Stockholders' Agreement")) holding a
Supermajority Interest (as defined in the Second Amended Stockholders'
Agreement) of the Class A-1 Preferred Shares and the Class B Preferred Shares,
collectively, may determine whether dividends declared on the Class B Preferred
Shares and the Class A-1 Preferred Shares shall be payable in cash or in
additional shares; provided that the dividends with respect to each of the Class
B Preferred Shares and the Class A-1 Preferred Shares shall be payable in the
same form and (b) the Investors holding a Supermajority Interest of the Class C
Preferred Shares may determine whether dividends declared on the Class C
Preferred Shares shall be payable in cash or in additional shares.
B. Liquidation Preference.
----------------------
(1) In the event of any liquidation, dissolution or winding up of the
Corporation, the holders of the Preferred Shares shall be entitled to receive,
prior to and in preference to any payment or distribution and setting apart for
payment or distribution of any of the assets or surplus funds of the Corporation
to the holders of the Common Shares, an amount (the "Liquidation Preference")
for each Class A Preferred Share, Class A-1 Preferred Share, Class B Preferred
Share and Class C Preferred Shares then held by them, equal to $2.48, $1.2645,
$1.2645 and $3.407, respectively, plus, in each case, any accrued and unpaid
dividends on the Class A Preferred Shares, the Class A-1 Preferred Shares, the
Class B Preferred Shares and the Class C Preferred Shares, whether or not or
declared, to and including the date of full payment of such Liquidation
Preference. If upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Preferred Shares shall be insufficient to
permit the payment to such holders of the full Liquidation Preference, then the
entire assets and funds of the Company legally available for distribution shall
be distributed in the following order: (a) first, among the holders of Class C
Preferred Shares, provided, that if such distribution is insufficient to permit
the payment to the holders of the Class C Preferred Shares of the full
Liquidation Preference, then such distribution shall be made pro rata to the
holders of the Class C Preferred Shares; (b) second, among the holders of Class
B Preferred Shares, provided, that if such distribution is insufficient to
permit the payment to the holders of the Class B Preferred Shares of the full
Liquidation Preference, then such distribution shall be made pro rata to the
holders of the Class B Preferred Shares; and (c) third, among the holders of
Class A Preferred Shares and the Class A-1 Preferred Shares, provided, that if
such distribution is insufficient to permit the payment to the holders of the
Class A Preferred Shares and Class A-1 Preferred Shares of the full Liquidation
Preference, then such distribution shall be made pro rata to the holders of the
Class A Preferred Shares and Class A-1 Preferred Shares.
<PAGE>
-5-
(2) If the assets of the Corporation available for distribution to
the Corporation's stockholders exceed the aggregate Liquidation Preference
payable to the holders of the Preferred Shares pursuant to Article V(B)(1), then
after the payments required by Article V(B)(1) shall have been made or
irrevocably set apart for payment, the remaining assets shall be distributed
among the holders of the Preferred Shares (as if fully converted into Common
Shares pursuant to Article VI) and the holders of the Common Shares, on a per
share basis.
C. Consolidation or Merger as a Liquidation. A consolidation or
----------------------------------------
merger of the Corporation (except (i) into a wholly-owned subsidiary of the
Corporation with requisite stockholder approval or (ii) a merger in which the
beneficial owners of the Corporation's capital stock immediately prior to such
transaction hold no less than fifty percent (50%) of the voting power in the
resulting entity in substantially the same proportions), a sale of all or
substantially all of the assets of the Corporation or the sale of in excess of
fifty percent (50%) of the voting power in the Corporation in a single
transaction or a series of related transactions (all of such events being
referred to as a "Sale Event") shall be regarded as a liquidation, dissolution
or winding up of the affairs of the Corporation within the meaning of this
Article V; provided, however, that each holder of Class A-1 Preferred Shares,
Class B Preferred Shares or Class C Preferred Shares shall have the right to
elect the benefits of the provisions of Article VI(E) hereof in lieu of
receiving payment in liquidation, dissolution or winding up of the Corporation
pursuant to this Article V.
D. Distributions in Cash. The Liquidation Preference shall in all
---------------------
events be paid in cash; provided, however, that if the Liquidation Preference is
payable in connection with a Sale Event, then each holder of the Preferred
Shares may, at its election, receive payment of the Liquidation Preference in
the same form of consideration as is payable with respect to the Common Shares
in such Sale Event.
E. Voting. The holders of the Common Shares and the Preferred
------
Shares shall be entitled to receive notice of and attend any meeting of
stockholders of the Corporation and shall be entitled to one (1) vote thereat
for each Common Share held or for each Common Share into which the Preferred
Shares are convertible.
F. Cancellation of Shares. Preferred Shares redeemed or purchased
----------------------
by the Corporation shall be cancelled.
G. Issuance of Shares. Without the consent of the holders of at
------------------
least sixty (60%) of the Class B Preferred Shares, the Corporation shall be
prohibited from issuing any shares that have rights that are on parity with,
other than with respect to voting, or are superior to the rights of the Class B
Preferred Shares. Without the consent of the holders of at least sixty percent
<PAGE>
-6-
(60%) of the Class C Preferred Shares, the Corporation shall be prohibited from
issuing any shares that have rights that are on parity with, other than with
respect to voting, or are superior to the rights of the Class C Preferred
Shares. The issuance of Common Stock in a Qualified IPO (as defined in Article
VI(A)(1)(a)) shall not require the consents set forth in this Article V(G).
H. Redemption Rights of the Class A Preferred Shareholders. Five
-------------------------------------------------------
years after the date of first issue of the Class B Preferred Shares, or when
none of the Investors (as defined in the Second Amended Stockholders' Agreement)
is a shareholder of Rowe Communications Ltd. or the Corporation, whichever
occurs later, and at any time and from time to time thereafter, but subject to
the provisions of the DGCL, a holder of Class A Preferred Shares shall be
entitled to require the Corporation to redeem, at any time, upon giving notice
as hereinafter provided, all, but not less than all, of the Class A Preferred
Shares registered in the name of such holder on the books of the Corporation at
a redemption price per share equal to the Liquidation Preference plus all unpaid
cumulative dividends, whether or not declared, which shall have accrued thereon
and which, for such purposes, shall be treated as accruing up to and including
the date of such redemption (hereinafter the "Redemption Price"). A holder of
Class A Preferred Shares exercising his option to have the Corporation redeem,
shall give written notice to the Corporation which notice shall set out the date
on which the Corporation is to redeem, which date shall not be less than ten
(10) days nor more than thirty (30) days from the date of mailing of the notice.
The date on which the redemption at the option of the holder is to occur is
hereinafter referred to as the "Redemption Date." The holder of any Class A
Preferred Shares may revoke such notice by written notice delivered to the
Corporation at least three (3) business days prior to the Redemption Date. Upon
delivery to the Corporation of a share certificate or certificates representing
the Class A Preferred Shares which the holder desires to have the Corporation
redeem, the Corporation shall on the Redemption Date redeem such Class A
Preferred Shares by paying to the holder the Redemption Price for each
outstanding Class A Preferred Share. Such payment shall be made by certified
check payable at any branch of the Corporation's bankers for the time being in
the United States of America. Upon payment of the Redemption Price for each
Class A Preferred Share to be redeemed by the Corporation, the holders thereof
shall cease to be entitled to dividends or to exercise any right of holders in
respect thereof.
ARTICLE VI
A. Right to Convert.
----------------
(1) Subject to Article VI(C), each outstanding Class A Preferred
Share shall be converted, automatically and without further action, into one
fully paid and non-assessable Common Share:
<PAGE>
-7-
(a) Immediately prior to the closing of the first underwritten public
offering of Common Stock of the Corporation registered in an
effective registration statement under the Securities Act of
1933, as amended, if the equity valuation of the Corporation
immediately before such offering is at least $80 million, and the
aggregate gross proceeds from the offering are at least
$20,000,000 (for this purpose, equity valuation means the product
of the initial per-share price at which Common Shares are offered
to the public in the offering multiplied by the number of Common
Shares that are outstanding, or that are issuable upon conversion
of Preferred Shares that are outstanding, immediately before the
offering) (a "Qualified IPO");
(b) At any time that a holder of Class A Preferred Shares elects to
convert his or her shares into Common Shares, but in such event
only such holder's Class A Preferred Shares shall be converted
into Common Shares, and the outstanding Class A Preferred Shares
held by other holders shall not be so converted; or
(c) At the same time as any Class A-1 Preferred Shares, Class B
Preferred Shares, or Class C Preferred Shares shall be converted
into Common Shares.
(2) Subject to Article VI(C), each outstanding Class A-1 Preferred
Share shall be converted, automatically and without further action, into one
fully paid and non-assessable Common Share:
(a) Immediately prior to the closing of a Qualified IPO; or
(b) At any time that a holder of Class A-1 Preferred Shares elects to
convert his or her shares into Common Shares, but in such event
only such holder's Class A-1 Preferred Shares shall be converted
into Common Shares, and the outstanding Class A-1 Preferred
Shares held by other holders shall not be so converted.
(3) Subject to Article VI(C), each outstanding Class B Preferred
Share shall be converted, automatically and without further action, into one
fully paid and non-assessable Common Share:
(a) Immediately prior to the closing of a Qualified IPO;
<PAGE>
-8-
(b) At any time that a holder of Class B Preferred Shares elects to
convert his or her shares into Common Shares, but in such event
only such holder's Class B Preferred Shares shall be converted
into Common Shares, and the outstanding Class B Preferred Shares
held by other holders shall not be so converted; or
(c) At any time that the Corporation is notified that seventy-five
percent (75%) or more of the holders of the Class B Preferred
Shares have voted in favor of such conversion.
(4) Subject to Article VI(C), each outstanding Class C Preferred
Share shall be converted, automatically and without further action, into one
fully paid and non-assessable Common Share:
(a) Immediately prior to the closing of a Qualified IPO;
(b) At any time that a holder of Class C Preferred Shares elects to
convert his or her shares into Common Shares, but in such event
only such holder's Class C Preferred Shares shall be converted
into Common Shares, and the outstanding Class C Preferred Shares
held by other holders shall not be so converted; or
(c) At any time that the Corporation is notified that seventy-five
percent (75%) or more of the holders of the Class C Preferred
Shares have voted in favor of such conversion.
B. Rights to Dividends. Upon any conversion of Preferred Shares
-------------------
into Common Shares as a result of the closing of a Qualified IPO, any and all
rights to any accrued and unpaid dividends shall cease.
C. Adjustments to Conversion Ratio. As provided in Article VI(A),
-------------------------------
the conversion ratio with respect to the number of Common Shares received upon
conversion of the Preferred Shares initially shall be one Common Share for each
Preferred Share (the "Conversion Ratio"). The Conversion Ratio with respect to
each class of Preferred Stock in effect from time to time shall be subject to
adjustment as follows:
(1) Stock Dividends, Subdivisions and Combinations. Upon the issuance
----------------------------------------------
of additional Common Shares as a dividend or other distribution on outstanding
Common Shares, the subdivision of outstanding Common Shares into a greater
number of Common Shares, or the combination of outstanding Common Shares into a
smaller number of Common Shares
<PAGE>
-9-
(including the 0.34905-for-one reverse stock split of the Common Shares effected
hereby), the applicable Conversion Ratio shall, simultaneously with the
happening of such dividend, subdivision or split be adjusted by multiplying the
then effective Conversion Ratio by a fraction, the numerator of which shall be
the number of Common Shares outstanding immediately after such event and the
denominator of which shall be the number of Common Shares outstanding
immediately prior to such event. An adjustment made pursuant to this Article
VI(C)(1) shall be given effect, upon payment of such a dividend or distribution,
as of the record date for the determination of stockholders entitled to receive
such dividend or distribution (on a retroactive basis) and in the case of a
subdivision or combination shall become effective immediately as of the
effective date thereof.
(2) Sale of Common Stock. In the event the Corporation shall at any
--------------------
time or from time to time (x) after the initial issuance by the Corporation of
Class B Preferred Shares with respect to Class A Preferred Shares, Class A-1
Preferred Shares or Class B Preferred Shares or (y) after the issuance by the
Corporation of Class C Preferred Shares with respect to Class C Preferred
Shares, and while such Preferred Shares are outstanding, issue, sell or exchange
any Common Shares (including shares held in the Corporation's treasury but
excluding (i) shares issued to employees, officers, directors or consultants of
the Corporation pursuant to stock purchase or stock option plans approved by the
Board of Directors, but in no event in excess of 2,620,371 Common Shares, plus
such number of Common Shares which are repurchased by the Corporation from any
such persons after such date pursuant to contractual rights held by the
Corporation and at repurchase prices not exceeding the respective original
purchase prices paid by such persons to the Corporation therefor, (ii) shares
issued in connection with the acquisition of a business or portion thereof, or
an entity or the assets of an entity, (iii) shares issued to financial
institutions or lessors in connection with commercial credit arrangements,
equipment financings or similar transactions, each of which must be approved by
the Board of Directors, including all directors appointed by holders of the
Preferred Shares, (iv) shares issued upon the conversion of the Preferred Shares
pursuant to Article VI(A) and (v) shares as to which an adjustment to the
Conversion Ratio has been made in accordance with Article VI(C)(1) (all of the
shares in clauses (i) through (v) shall be referred to herein as the "Excluded
Shares")), for a consideration per share less than (A) $1.2645 with respect to
Class A Preferred Shares, Class A-1 Preferred Shares or Class B Preferred Shares
or (B) $3.407 with respect to Class C Preferred Shares (as applicable, the
"Conversion Price") then, and thereafter successively upon each such issuance,
sale or exchange, the Conversion Ratio in effect with respect to such class of
Preferred Shares immediately prior to the issuance, sale or exchange of such
shares shall forthwith be increased to an amount determined by multiplying the
Conversion Ratio by a fraction:
(a) the numerator of which shall be (i) the number of Common
Shares outstanding immediately prior to the issuance of such
additional Common Shares (excluding treasury shares but
<PAGE>
-10-
including all Common Shares issuable upon conversion or exercise of
any outstanding Preferred Shares, options, warrants, rights or
convertible securities), plus (ii) the number of such additional
Common Shares so issued; and
(b) the denominator of which shall be (i) the number of Common
Shares outstanding immediately prior to the issuance of such
additional Common Shares (excluding treasury shares but including all
Common Shares issuable upon conversion or exercise of any outstanding
Preferred Shares, options, warrants, rights or convertible
securities), plus (ii) the number of Common Shares which the net
aggregate consideration received by the Corporation for the total
number of such additional Common Shares so issued would purchase at
the applicable Conversion Price per share.
(3) Sale of Options, Rights or Convertible Securities. In the event
-------------------------------------------------
the Corporation shall at any time or from time to time (x) after the initial
issuance by the Corporation of Class B Preferred Shares with respect to Class A
Preferred Shares, Class A-1 Preferred Shares or Class B Preferred Shares or (y)
after the initial issuance by the Corporation of Class C Preferred Shares with
respect to Class C Preferred Shares, and while such Preferred Shares are
outstanding, issue options, warrants or rights to subscribe for Common Shares
(other than any options for Excluded Shares), or issue any securities
convertible into or exchangeable for Common Shares, for a consideration per
share (determined by dividing the Net Aggregate Consideration (as determined
below) by the aggregate number of Common Shares that would be issued if all such
options, warrants, rights or convertible securities were exercised or converted
to the fullest extent permitted by their terms) less than the applicable
Conversion Price per share for such Preferred Shares, such Conversion Ratio for
such Preferred Shares in effect immediately prior to the issuance of such
options, warrants or rights or securities shall be increased to an amount
determined by multiplying such Conversion Ratio by a fraction:
(a) the numerator of which shall be (i) the number of Common
Shares of all classes outstanding immediately prior to the issuance of
such options, warrants, rights or convertible securities (excluding
treasury shares but including all Common Shares issuable upon
conversion or exercise of any outstanding Preferred Shares, options,
warrants, rights or convertible securities), plus (ii) the aggregate
number of Common Shares that would be issued if all such options,
warrants, rights or convertible securities were exercised or
converted; and
(b) the denominator of which shall be (i) the number of Common
Shares of all classes outstanding immediately prior to
<PAGE>
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the issuance of such options, warrants, rights or convertible
securities (excluding treasury shares but including all Common Shares
issuable upon conversion or exercise of any outstanding Preferred
Shares, options, warrants, rights or convertible securities), plus
(ii) the number of Common Shares which the total amount of
consideration received by the Corporation for the issuance of such
options, warrants, rights or convertible securities plus the minimum
amount set forth in the terms of such security as payable to the
Corporation upon the exercise or conversion thereof (the "Net
Aggregate Consideration") would purchase at the applicable Conversion
Price per share of such class of Preferred Shares.
(4) Expiration or Change in Ratio. If the consideration per share
-----------------------------
provided for in any options or rights to subscribe for Common Shares or any
securities exchangeable for or convertible into Common Shares changes at any
time (other than by reason of the anti-dilution provisions of such warrants,
options or rights to subscribe for Common Shares), the applicable Conversion
Ratio for each class of Preferred Shares in effect at the time of such change
shall be readjusted to the Conversion Ratio which would have been in effect at
such time had such options or convertible securities provided for such changed
consideration per share (determined as provided in Article VI(C)(3)), at the
time initially granted, issued or sold; provided, that such adjustment of the
--------
Conversion Ratio will be made only as and to the extent that the Conversion
Ratio effective upon such adjustment remains greater than or equal to the
Conversion Ratio that would be in effect if such options, rights or securities
had not been issued. No adjustment of the Conversion Ratio shall be made under
this Article VI upon the issuance of any additional Common Shares which are
issued pursuant to the exercise of any warrants, options or other subscription
or purchase rights or pursuant to the exercise of any conversion or exchange
rights in any convertible securities if an adjustment shall previously have been
made upon the issuance of such warrants, options or other rights. Any adjustment
of the Conversion Ratio shall be disregarded if, as and when the rights to
acquire Common Shares upon exercise or conversion of the warrants, options,
rights or convertible securities which gave rise to such adjustment expire or
are canceled without having been exercised, so that the Conversion Ratio
effective immediately upon such cancellation or expiration shall be equal to the
Conversion Ratio in effect at the time of the issuance of the expired or
canceled warrants, options, rights or convertible securities, with such
additional adjustments as would have been made to that Conversion Ratio had the
expired or canceled warrants, options, rights or convertible securities not been
issued.
(5) Consideration for Stock. In case any Common Shares or options,
------------------------
warrants or rights to subscribe for Common Shares shall be issued or sold for
cash, the consideration received therefor shall be deemed to be the amount
received by the Corporation therefor, without deduction therefrom of any
expenses incurred or any underwriting commissions or concessions paid or
<PAGE>
-12-
allowed by the Corporation in connection therewith. In case any Common Shares or
options, warrants or rights to subscribe for Common Shares shall be issued or
sold for a consideration other than cash, the amount of the consideration other
than cash received by the Corporation shall be deemed to be the fair value of
such consideration as determined in good faith by the Board of Directors,
without deduction of any expense incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection therewith. In case
any options shall be issued in connection with the issue and sale of other
securities of the corporation, together comprising one integral transaction in
which no specific consideration is allocated to such options by the parties
thereto, such options shall be deemed to have been issued for such consideration
as determined in good faith by the Board of Directors.
D. Other Adjustments. In the event the Corporation shall make or
-----------------
issue or fix a record date for the determination of holders of Common Shares
entitled to receive a dividend or other distribution payable in securities of
the Corporation other than Common Shares, then and in each such event lawful and
adequate provision shall be made so that the holders of the Preferred Shares
shall receive upon conversion thereof in addition to the number of Common Shares
receivable thereupon, the number of securities of the Corporation which they
would have received had their Preferred Shares been converted into Common Shares
on the date of such event and had they thereafter, during the period from the
date of such event to and including the Conversion Date (as that term is
hereafter defined), retained such securities receivable by them as aforesaid
during such period, giving application to all adjustments called for during such
period under this Article VI as applied to such distributed securities.
If the Common Shares issuable upon the conversion of the Preferred
Shares shall be changed into the same or different number of shares of any class
or classes of stock, whether by reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend provided for above, or a
reorganization, merger, consolidation or sale of assets provided for elsewhere
in Article V or in this Article VI), then and in each such event the holder of
each Preferred Share shall have the right thereafter to convert such share 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 Common Shares into which such Preferred Share might have been
converted immediately prior to such reorganization, reclassification or change,
all subject to further adjustment as provided herein.
E. Mergers and Other Reorganizations. If at any time or from time
---------------------------------
to time there shall be a capital reorganization of the Common Shares (other than
a subdivision, combination, reclassification or exchange of shares provided for
elsewhere in this Article VI) or a Sale Event, then, as part of and as a
condition to the effectiveness of such reorganization, merger, consolidation or
sale, lawful and adequate provision shall be made so that the holders of each
<PAGE>
-13-
Preferred Share shall thereafter be entitled to receive upon conversion of such
Preferred Share the number of shares of stock or other securities or property of
the Corporation or of the successor corporation resulting from such merger or
consolidation or sale, to which a holder of Common Shares deliverable upon
conversion would have been entitled on such capital reorganization, merger,
consolidation or sale. In any such case, appropriate provisions shall be made
with respect to the rights of the holders of the Preferred Shares after the
reorganization, merger, consolidation or sale to the end that the provisions of
this Article VI (including, without limitation provisions for adjustment of the
Conversion Ratio and the number of shares receivable upon conversion of each
Preferred Share) shall thereafter be applicable, as nearly as may be, with
respect to any shares of stock, securities or assets to be deliverable upon the
conversion of the Preferred Shares.
Each holder of Preferred Shares upon the occurrence of a capital
reorganization or a Sale Event, as such events are more fully set forth in the
first paragraph of this Article VI(E), shall have the option of electing
treatment of his Class A-1 Preferred Shares, Class B Preferred Shares or Class C
Preferred Shares under either this Article VI(E) or Article V hereof, notice of
which election shall be submitted in writing to the Corporation at its principal
offices no later than ten (10) days before the effective date of such event,
provided that any such notice shall be effective if given not later than fifteen
(15) days after the date of the Corporation's notice with respect to such event.
F. Certificate of Adjustments. In each case of an adjustment or
--------------------------
readjustment of the Conversion Ratio of any Preferred Share, the Corporation at
its expense will furnish each holder such Preferred Share with a certificate,
prepared by the chief financial officer of the Corporation, showing such
adjustment or readjustment in accordance with the terms hereof, 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
Preferred Shares, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
applicable Conversion Ratio at the time in effect, and (iii) the number of
Common Shares, the Liquidation Preference and the amount, if any, of other
property which at the time would be received upon the conversion of the
Preferred Shares, as applicable.
G. Issue Tax. The issuance of certificates for Common Shares upon
---------
conversion of Preferred Shares shall be made without charge to the holders
thereof for any issuance tax in respect thereof, provided that the Corporation
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any certificate in a name
other than that of the holder of Preferred Shares which are being converted.
<PAGE>
-14-
H. Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any Preferred Share or of any Common
Shares issued or issuable upon the conversion of any Preferred Share in any
manner which interferes with the timely conversion of such Preferred Share,
except as may otherwise be required to comply with applicable securities laws.
ARTICLE VII
The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Corporation and for defining
and regulating the powers of the Corporation and its directors and stockholders
and are in furtherance and not in limitation of the powers conferred upon the
Corporation by statute:
(a) The election of directors of the Corporation need not be by
written ballot; and
(b) Subject to such limitations as may be from time to time imposed
by other provisions of this Certificate of Incorporation, by the
bylaws of the Corporation, by applicable statutory or other law,
or by any contract or agreement to which the Corporation is or
may become party, the Board of Directors shall have the power and
authority,
(1) To adopt, amend, or repeal the by-laws of the Corporation;
(2) To the full extent permitted or not prohibited by law, and
without the consent of or other action by the stockholders
to authorize and/or create mortgages, pledges and/or other
liens or encumbrances upon any or all of the assets, real,
personal or mixed, and franchises of the Corporation,
including after acquired property, and to exercise all of
the powers of the Corporation in connection therewith; and
(3) To determine whether, to what extent, at what times and
places, and under what conditions the records, accounts,
books, and papers of the Corporation shall be open for
inspection by its stockholders, and no stockholder shall
have any right to inspect any record, account, book, or
paper of the Corporation
<PAGE>
-15-
except as conferred by statute or authorized by the Board of
Directors.
(c) Beginning with and from and after the first annual meeting of the
Corporation's stockholders held following the closing of the
Qualified IPO, the Board of Directors shall be divided into three
classes of directors, such classes to be as nearly equal in
number of directors as possible, having staggered three-year
terms of office, the term of office of the directors of the first
such class to expire as of the first annual meeting of the
Company's stockholders following the closing of such Qualified
IPO, those of the second class to expire as of the second annual
meeting of the Company's stockholders following such closing, and
those of the third class as of the third annual meeting of the
Company's stockholders following such closing, such that at each
annual meeting of stockholders after such closing, nominees will
stand for election to succeed those directors whose terms are to
expire as of such meeting. Any director serving as such pursuant
to this paragraph (c) of Article VII may be removed only for
cause and only by the vote of the holders of a majority of the
shares of the Company's stock entitled to vote for the election
of directors.
ARTICLE VIII
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as director, except to the extent that the elimination or limitation of
such liability is not permitted by the DGCL, as the same exists or may hereafter
be amended.
No amendment to or repeal of this Article VIII shall apply to or have
any effect on the liability or alleged liability of any director for or with
respect to any acts or omissions occurring prior to the effective date of such
amendment or repeal.
ARTICLE IX
The Corporation shall indemnify each director and officer of the
Corporation, his heirs, executors and administrators and may indemnify each
employee and agent of the Corporation, his heirs, executors, administrators and
all other persons whom the Corporation is authorized to indemnify under the
provisions of the DGCL, to the extent provided for by law (a) against all
<PAGE>
-16-
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement actually and reasonably incurred by him in connection with any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, or in connection with any appeal therein, or otherwise, and (b)
against all expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of any action or
suit by or in the right of the Corporation, or in connection with any appeal
therein, or otherwise; and no provision of this Article IX is intended to be
construed as limiting, prohibiting, denying or abrogating any of the general or
specific powers or rights conferred by the DGCL upon the Corporation to furnish,
or upon any court to award, such indemnification, or indemnification as
otherwise authorized pursuant to the DGCL or any other law now or hereafter in
effect.
The Board of Directors may in its discretion authorize the Corporation
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him or incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the foregoing
paragraph of this Article IX.
No amendment to or repeal of this Article IX shall apply to or have
any effect on the obligations of the Corporation or the rights of any other
person with respect to any acts or omissions occurring prior to the effective
date of such amendment or repeal.
ARTICLE X
Whenever a compromise or agreement is proposed between the Corporation
and its creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for the Corporation under the provisions of
Section 291 of the DGCL or on the application of trustees in dissolution or of
any receiver or receivers appointed for the Corporation under the provisions of
Section 279 of the DGCL, order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, to be summoned in such a manner as the said court directs. If at
least a majority of the number representing three-fourths (3/4ths) in value of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of the Corporation as a consequence of
such compromise or arrangement, the
<PAGE>
-17-
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all
creditors or class of creditors, and/or stockholders or class of stockholders of
the Corporation, as the case may be, and also on the Corporation.
ARTICLE XI
Subject to such limitations as may be from time to time imposed by
other provisions of this Third Amended and Restated Certificate of
Incorporation, by the bylaws of the Corporation, by applicable statutory or
other law, or by an contract or agreement to which the Corporation is or may
become party, the Corporation reserves the right to amend or repeal any
provision contained in this Third Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholder's herein are granted subject to this express
reservation.
ARTICLE XII
The Board of Directors, when considering a tender offer or merger or
acquisition proposal, may take into account factors in addition to potential
economic benefits to stockholders, including without limitation (i) comparison
of the proposed consideration to be received by stockholders in relation to the
then current market price of the Corporation's capital stock, the estimated
current value of the Corporation in a freely negotiated transaction, and the
estimated future value of the Corporation as an independent entity, and (ii) the
impact of such a transaction on the non-officer employees, suppliers, and
customers of the Corporation and its effect on the communities in which the
Corporation operates.
ARTICLE XIII
Effective from and after the closing of the Qualified IPO, (i) any
action required or permitted to be taken by the stockholders of the Corporation
may be taken only at a duly called meeting of the stockholders, and not by
written consent in lieu of such a meeting, and (ii) special meetings of
stockholders may be called only by the Chairman of the Board of Directors, the
President, or a majority of the Board of Directors, provided, that special
meetings of stockholders for the sole purpose of filling one or more vacancies
in the Board of Directors may be called as provided in Section 3.1(c) of the
Company's Amended and Restated By-Laws (as they may be amended and in effect
from time to time), and provided, further, that special meetings of stockholders
for any purpose or purposes may be called by the holders of at least 67% of the
shares of the Company's stock entitled to vote for the election of directors.
<PAGE>
-18-
ARTICLE XIV
Effective from and after the closing of the Qualified IPO, the
affirmative vote of the holders of at least 67% of the outstanding voting stock
of the Corporation (in addition to any separate class vote that may in the
future be required pursuant to the terms of any outstanding Preferred Stock)
shall be required to amend or repeal the provisions of Articles IV (to the
extent it relates to the authority of the Board of Directors to issue shares of
Preferred Stock in one or more series, the terms of which may be determined by
the Board of Directors), VII(c), VIII, IX, XII, or XIII or this Article XIV of
this Third Amended and Restated Certificate of Incorporation, or to decrease the
numbers of authorized shares of Common Stock or Preferred Stock.
<PAGE>
EXHIBIT 3.2
ROWECOM INC.
------------
AMENDED AND RESTATED BY-LAWS
----------------------------
Article I - General.
-------------------
1.1. OFFICES. The registered office of RoweCom, Inc. (the "Company") will
-------
be in the City of Wilmington, County of New Castle, State of Delaware. The
Company may also have offices at such other places both within and without the
State of Delaware as the Board of Directors may from time to time determine or
the business of the Company may require.
1.2 SEAL. The seal, if any, of the Company will be in the form of a
----
circle and will have inscribed thereon the name of the Company, the year of its
organization and the words "Corporate Seal, Delaware."
1.3 FISCAL YEAR. Except as otherwise determined by the Board of
-----------
Directors, the fiscal year of the Company will be the period from January 1st
through December 31st.
ARTICLE II - STOCKHOLDERS.
-------------------------
2.1 PLACE OF MEETINGS. Each meeting of the stockholders will be held at
-----------------
such place or places as the Board of Directors may have determined and as will
be stated in the notices of the meetings.
2.2 ANNUAL MEETING. The annual meeting of the stockholders will be held
--------------
each year on such date and at such time as the Board of Directors may determine.
At each annual meeting the stockholders entitled to vote will elect such
members of the Board of Directors as are standing for election, by plurality
vote, and they may transact such other corporate business as may properly be
brought before the meeting. At the annual meeting any business may be
transacted, irrespective of whether the notice calling such meeting will have
contained a reference thereto, except where notice is required by law, the
Company's Certificate of Incorporation as amended and/or restated from time to
time and as in effect as of the relevant time (the "Certificate of
Incorporation"), or these by-laws.
2.3 QUORUM. At all meetings of the stockholders the holders of a
------
majority of the stock issued and outstanding and entitled to vote thereat,
present in person or represented by proxy, will constitute a quorum
<PAGE>
-2-
requisite for the transaction of business except as otherwise provided by law,
the Certificate of Incorporation, or these by-laws. If, however, such majority
will not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or by proxy, by a
majority vote, will have power to adjourn the meeting from time to time without
notice other than announcement at the meeting until the requisite amount of
voting stock will be present. If the adjournment is for more than thirty (30)
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting will be given to each stockholder of
record entitled to vote at the meeting. At such adjourned meeting, at which the
requisite amount of voting stock will be represented, any business may be
transacted that might have been transacted if the meeting had been held as
originally called.
2.4 RIGHT TO VOTE; PROXIES. Subject to the provisions of the Certificate
----------------------
of Incorporation, each holder of a share or shares of capital stock of the
Company having the right to vote at any meeting will be entitled to one vote for
each such share of stock held by him. Any stockholder entitled to vote at any
meeting of stockholders may vote either in person or by proxy, but no proxy that
is dated more than three years prior to the meeting at which it is offered will
confer the right to vote thereat unless the proxy provides that it will be
effective for a longer period. A proxy may be granted by a writing executed by
the stockholder or his authorized agent or by transmission or authorization of
transmission of a telegram, cablegram, or other means of electronic transmission
to the person who will be the holder of the proxy or to a proxy solicitation
firm, proxy support service organization or like agent duly authorized by the
person who will be the holder of the proxy to receive such transmission,
subject to the conditions set forth in Section 212 of the Delaware General
Corporation Law, as it may be amended from time to time (the "DGCL").
2.5 VOTING. At all meetings of stockholders, except as otherwise
------
expressly provided for by statute, the Certificate of Incorporation, or these
by-laws, (i) in all matters other than the election of directors, the
affirmative vote of a majority of shares present in person or represented by
proxy at the meeting and entitled to vote on such matter will be the act of the
stockholders and (ii) directors will be elected by a plurality of the votes of
the shares present in person or represented by proxy at the meeting and entitled
to vote on the election of directors.
2.6 NOTICE OF ANNUAL MEETINGS. Written notice of the annual meeting of
-------------------------
the stockholders will be mailed to each stockholder entitled to
<PAGE>
-3-
vote thereat at such address as appears on the stock books of the Company at
least ten (10) days (and not more than sixty (60) days) prior to the meeting. It
will be the duty of every stockholder to furnish to the Secretary of the Company
or to the transfer agent, if any, of the class of stock owned by him, his post-
office address and to notify said Secretary or transfer agent of any change
therein.
2.7 STOCKHOLDERS' LIST. A complete list of the stockholders entitled to
------------------
vote at any meeting of stockholders, arranged in alphabetical order and showing
the address of each stockholder, and the number of shares registered in the name
of each stockholder, will be prepared by the Secretary and filed either at a
place within the city where the meeting is to be held, which place will be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held, at least ten days before such meeting, and will
at all times during the usual hours for business, and during the whole time of
said election, be open to the examination of any stockholder for a purpose
germane to the meeting.
2.8 SPECIAL MEETINGS. Special meetings of the stockholders for any
----------------
purpose or purposes, unless otherwise provided by statute, may be called only by
the Board of Directors or the President; provided, that special meetings for the
sole purpose of filling one or more vacancies in the Board of Directors may be
called as provided in Section 3.1(c) hereof, and provided, further, that special
meetings for any purpose or purposes may be called by the holders of at least
67% of the shares of the Company's stock entitled to vote for the election of
directors.
2.9 NOTICE OF SPECIAL MEETINGS. Written notice of a special meeting of
--------------------------
stockholders, stating the time and place and object thereof will be mailed,
postage prepaid, not less than ten (10) nor more than sixty (60) days before
such meeting, to each stockholder entitled to vote thereat, at such address as
appears on the books of the Company. No business may be transacted at such
meeting except that referred to in said notice, or in a supplemental notice
given also in compliance with the provisions hereof, or such other business as
may be germane or supplementary to that stated in said notice or notices.
2.10 INSPECTORS.
----------
1. One or more inspectors may be appointed by the Board of Directors
before or at any meeting of stockholders, or, if no such appointment will
have been made, the presiding officer may make such appointment at the
meeting. At the meeting for which the inspector or inspectors are
appointed, he or they will open and close
<PAGE>
-4-
the polls, receive and take charge of the proxies and ballots, and decide
all questions touching on the qualifications of voters, the validity of
proxies and the acceptance and rejection of votes. If any inspector
previously appointed will fail to attend or refuse or be unable to serve,
the presiding officer will appoint an inspector in his place.
2. At any time at which the Company has a class of voting stock that
is (i) listed on a national securities exchange, (ii) authorized for
quotation on an inter-dealer quotation system of a registered national
securities association, or (iii) held of record by more than 2,000
stockholders, the provisions of Section 231 of the DGCL with respect to
inspectors of election and voting procedures will apply, in lieu of the
provisions of paragraph 1 of this (S)2.10.
2.11 STOCKHOLDERS' CONSENT IN LIEU OF MEETING. Unless otherwise provided
----------------------------------------
in the Certificate of Incorporation:
(a) Prior to the closing of an underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, covering the offering and sale of capital stock of the Company
(the "IPO"), any action required by law to be taken at any annual or
special meeting of stockholders of the Company, or any action that may be
taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, are signed by the
holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting
at which all shares entitled to vote thereon were present and voted and are
delivered to the Company by delivery to its registered office in the State
of Delaware, its principal place of business, or an officer or agent of the
Company having custody of the book in which proceedings of meetings of
stockholders are recorded.
(b) From and after the closing of the IPO, any action required to be
taken at any annual or special meeting of stockholders of the Company, or
any action that may be taken at any annual or special meeting of such
stockholders, may be taken only at such meeting and not by written consent
of the stockholders.
<PAGE>
-5-
2.12 PROCEDURES. For nominations for the Board of Directors or for other
----------
business to be properly brought by a stockholder before a meeting of
stockholders, the stockholder must first have given timely written notice
thereof to the Secretary of the Company. To be timely, a notice of nominations
or other business to be brought before an annual meeting of stockholders must be
delivered to the Secretary not less than 120 nor more than 150 days prior to the
first anniversary of the date of the Company's proxy statement delivered to
stockholders in connection with the preceding year's annual meeting, or if the
date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary, or if no proxy statement was delivered to stockholder by
the Company in connection with the preceding year's annual meeting, such notice
must be delivered not earlier than 90 days prior to such annual meeting and not
later than the later of (i) 60 days prior to the annual meeting or (ii) 10 days
following the date on which public announcement of the date of such annual
meeting is first made by the Company. With respect to special meetings of
stockholders, such notice must be delivered to the Secretary not more than 90
days prior to such meeting and not later than the later of (i) 60 days prior to
such meeting or (ii) 10 days following the date on which public announcement of
the date of such meeting is first made by the Company. Such notice must contain
the name and address of the stockholder delivering the notice and a statement
with respect to the amount of the Company's stock beneficially and/or legally
owned by such stockholder, the nature of any such beneficial ownership of such
stock, the beneficial ownership of any such stock legally held by such
stockholder but beneficially owned by one or more others, and the length of time
for which all such stock has been beneficially and/or legally owned by such
stockholder, and information about each nominee for election as a director
substantially equivalent to that which would be required in a proxy statement
pursuant to the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated by the Securities and Exchange Commission thereunder,
and/or a description of the proposed business to be brought before the meeting,
as the case may be.
ARTICLE III - DIRECTORS.
-----------------------
3.1 NUMBER OF DIRECTORS.
-------------------
(a) Except as otherwise provided by law, the Certificate of
Incorporation or these by-laws, the property and business of the Company
will be managed by or under the direction of a board of not less than one
nor more than thirteen directors. Within the limits specified, the number
of directors will be determined by resolution of the Board of
<PAGE>
-6-
Directors or by the stockholders at the annual meeting. Directors need not
be stockholders, residents of Delaware, or citizens of the United States.
(b) Subject to the provisions of the Certificate of Incorporation,
prior to the closing of the IPO, the directors will be elected at the
annual meeting of the stockholders and each director will be elected to
serve until his successor will be elected and will qualify or until his
earlier resignation or removal; provided that in the event of failure to
hold such meeting or to hold such election at such meeting, such election
may be held at any special meeting of the stockholders called for that
purpose.
(c) Subject to the provisions of the Certificate of Incorporation,
beginning with and from and after the first annual meeting of the Company's
stockholders following the closing of the IPO:
The number of directors constituting the full Board of Directors shall
be such number of directors as the Board of Directors from time to time may
determine, but in any event not more than six directors unless (i) all of
the then directors, or (ii) the holders of at least a majority of the
shares of the Company's stock entitled to vote for the election of
directors, vote in favor of or consent in writing to a larger number of
directors.
The Board of Directors shall be divided into three classes of
directors, such classes to be as nearly equal in number of directors as
possible, having staggered three-year terms of office, the term of office
of the directors of the first such class to expire as of the second annual
meeting of the Company's stockholders following the closing of the IPO,
those of the second class to expire as of the third annual meeting of the
Company's stockholders following such closing, and those of the third class
as of the fourth annual meeting of the Company's stockholders following
such closing, such that at each subsequent annual meeting of stockholders,
nominees will stand for election to succeed those directors whose terms are
to expire as of such meeting.
Members of the Board of Directors shall hold office until the annual
meeting of stockholders at which their
<PAGE>
-7-
respective successors are elected and qualified or until their earlier
death, incapacity, resignation, or removal.
Any director may resign at any time upon written notice to the
Company. Except as the DGCL may otherwise require, in the interim between
annual meetings of stockholders or special meetings of stockholders called
for the election of directors and/or for the removal of one or more
directors and for the filling of any vacancy in that connection, any
vacancies in the Board of Directors, including unfilled vacancies resulting
from the removal of directors for cause, may be filled by (and only by) the
vote of (i) all of the remaining directors or (ii) at least a majority of
the shares of the Company's stock entitled to vote for the election of
directors.
Any director or the entire Board of Directors may be removed only for
cause and only by the vote of the holders of at least a majority of the
shares of the Company's stock entitled to vote for the election of
directors.
3.2 [INTENTIONALLY LEFT BLANK]
3.3 RESIGNATION. Any director of this Company may resign at any time by
-----------
giving written notice to the Chairman of the Board the President, or the
Secretary of the Company. Such resignation will take effect at the time
specified therein, at the time of receipt if no time is specified therein and at
the time of acceptance if the effectiveness of such resignation is conditioned
upon its acceptance. Unless otherwise specified therein, the acceptance of such
resignation will not be necessary to make it effective.
3.4 REMOVAL. Any director or the entire Board of Directors may be
-------
removed, but only for good cause shown, by the holders of at least a majority of
the shares then entitled to vote at an election of directors.
3.5 PLACE OF MEETINGS AND BOOKS. The Board of Directors may hold their
---------------------------
meetings and keep the books of the Company outside the State of Delaware, at
such places as they may from time to time determine.
3.6 GENERAL POWERS. In addition to the powers and authority expressly
--------------
conferred upon them by these by-laws, the board may exercise all such powers of
the Company and do all such lawful acts and things as are not by statute or by
the Certificate of Incorporation or by these by-laws directed or required to be
exercised or done by the stockholders.
<PAGE>
-8-
3.7 EXECUTIVE COMMITTEE. There may be an executive committee of one or
-------------------
more directors designated by resolution passed by a majority of the whole board.
The act of a majority of the members of such committee will be the act of the
committee. Such committee may meet at stated times or on notice to all by any
of their own number, and will have and may exercise those powers of the Board of
Directors in the management of the business affairs of the Company as are
provided by law and may authorize the seal of the Company to be affixed to all
papers that may require it. Vacancies in the membership of such committee will
be filled by the Board of Directors at a regular meeting or at a special meeting
called for that purpose.
3.8 OTHER COMMITTEES. The Board of Directors may also designate one or
----------------
more committees in addition to the executive committee, by resolution or
resolutions passed by a majority of the whole board; such committee or
committees will consist of one or more directors of the Company, and to the
extent provided in the resolution or resolutions designating them, will have and
may exercise specific powers of the Board of Directors in the management of the
business and affairs of the Company to the extent permitted by statute and will
have power to authorize the seal of the Company to be affixed to all papers
which may require it. Such committee or committees will have such name or names
as may be determined from time to time by resolution adopted by the Board of
Directors.
3.9 POWERS DENIED TO COMMITTEES. Committees of the Board of Directors
---------------------------
will not, in any event, have any power or authority to amend the Certificate of
Incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares adopted by the
Board of Directors as provided in Section 151(a) of the DGCL, fix the
designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the Company or
the conversion into, or the exchange of such shares for, shares of any other
class or classes or any other series of the same or any other class or classes
of stock of the Company or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series), adopt an
agreement of merger or consolidation, recommend to the stockholders the sale,
lease or exchange of all or substantially all of the Company's property and
assets, recommend to the stockholders a dissolution of the Company or a
revocation of a dissolution. Further, no committee of the Board of Directors
will have the power or authority to declare a dividend, to authorize the
issuance of stock or to adopt a certificate of ownership and
<PAGE>
-9-
merger pursuant to Section 253 of the DGCL, unless the resolution or resolutions
designating such committee expressly so provides.
3.10 SUBSTITUTE COMMITTEE MEMBER. In the absence or on the
---------------------------
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of such absent or disqualified
member. Any committee will keep regular minutes of its proceedings and report
the same to the board as may be required by the board.
3.11 COMPENSATION OF DIRECTORS. The Board of Directors will have the
-------------------------
power to fix the compensation of directors and members of committees of the
Board. The directors may be paid their expenses, if any, of attendance at each
meeting of the Board of Directors and may be paid a fixed sum for attendance at
each meeting of the Board of Directors or a stated salary as director. No such
payment will preclude any director from serving the Company in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
3.12 ANNUAL MEETING. The newly elected board may meet at such place and
--------------
time as will be fixed and announced by the presiding officer at the annual
meeting of stockholders, for the purpose of organization or otherwise, and no
further notice of such meeting will be necessary to the newly elected directors
in order legally to constitute the meeting, provided a quorum will be present,
or they may meet at such place and time as will be stated in a notice given to
such directors two (2) days prior to such meeting, or as will be fixed by the
consent in writing of all the directors.
3.13 REGULAR MEETINGS. Regular meetings of the board may be held without
----------------
notice at such time and place as will from time to time be determined by the
board.
3.14 SPECIAL MEETINGS. Special meetings of the board may be called by the
----------------
Chairman of the Board, if any, or the President, on two (2) days notice to each
director, or such shorter period of time before the meeting as will nonetheless
be sufficient for the convenient assembly of the directors so notified; special
meetings will be called by the Secretary in like manner and on like notice, on
the written request of two or more directors.
<PAGE>
-10-
3.15 QUORUM. At all meetings of the Board of Directors, a majority of the
------
total number of directors will be necessary and sufficient to constitute a
quorum for the transaction of business, and the act of a majority of the
directors present at any meeting at which there is a quorum will be the act of
the Board of Directors, except as may be otherwise specifically permitted or
provided by statute, or by the Certificate of Incorporation, or by these by-
laws. If at any meeting of the board there will be less than a quorum present,
a majority of those present may adjourn the meeting from time to time until a
quorum is obtained, and no further notice thereof need be given other than by
announcement at said meeting that will be so adjourned.
3.14 TELEPHONIC PARTICIPATION IN MEETINGS. Members of the Board of
------------------------------------
Directors or any committee designated by such board may participate in a meeting
of the board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
section will constitute presence in person at such meeting.
3.15 ACTION BY CONSENT. Unless otherwise restricted by the Certificate of
-----------------
Incorporation or these by-laws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if written consent thereto is signed by all members of the
board or of such committee as the case may be and such written consent is filed
with the minutes of proceedings of the board or committee.
ARTICLE IV - OFFICERS.
---------------------
4.1 SELECTION; STATUTORY OFFICERS. The officers of the Company will be
-----------------------------
chosen by the Board of Directors. There will be a President, a Secretary and a
Treasurer, and there may be a Chairman of the Board of Directors, one or more
Vice Presidents, one or more Assistant Secretaries, and one or more Assistant
Treasurers, as the Board of Directors may elect. Any number of offices may be
held by the same person, except that the offices of the President and Secretary
shall not be held by the same person simultaneously.
4.2 TIME OF ELECTION. The officers above named will be chosen by the
----------------
Board of Directors. None of such officers need be a director.
4.3 ADDITIONAL OFFICERS. The board may appoint such other officers and
-------------------
agents as it will deem necessary, who will hold their offices
<PAGE>
-11-
for such terms and will exercise such powers and perform such duties as will be
determined from time to time by the board.
4.4 TERMS OF OFFICE. Each officer of the Company will hold office until
---------------
his successor is chosen and qualified, or until his earlier resignation or
removal. Any officer elected or appointed by the Board of Directors may be
removed at any time by the Board of Directors.
4.5 COMPENSATION OF OFFICERS. The Board of Directors will have power to
------------------------
fix the compensation of all officers of the Company. It may authorize any
officer, upon whom the power of appointing subordinate officers may have been
conferred, to fix the compensation of such subordinate officers.
4.6 CHAIRMAN OF THE BOARD. The Chairman of the Board of Directors will
---------------------
preside at all meetings of the stockholders and directors, and will have such
other duties as may be assigned to him from time to time by the Board of
Directors.
4.7 PRESIDENT. Unless the Board of Directors otherwise determines, the
---------
President will be the chief executive officer and head of the Company. Unless
there is a Chairman of the Board, the President will preside at all meetings of
directors and stockholders. Under the supervision of the Board of Directors and
of the executive committee, the President will have the general control and
management of its business and affairs, subject, however, to the right of the
Board of Directors and of the executive committee to confer any specific power,
except such as may be by statute exclusively conferred on the President, upon
any other officer or officers of the Company. The President will perform and do
all acts and things incident to the position of President and such other duties
as may be assigned to him from time to time by the Board of Directors or the
executive committee.
4.8 VICE-PRESIDENTS. The Vice-Presidents will perform such of the duties
---------------
of the President on behalf of the Company as may be respectively assigned to
them from time to time by the Board of Directors or by the executive committee
or by the President. The Board of Directors or the executive committee may
designate one of the Vice-Presidents as the Executive Vice-President, and in the
absence or inability of the President to act, such Executive Vice-President will
have and possess all of the powers and discharge all of the duties of the
President, subject to the control of the board and of the executive committee.
<PAGE>
-12-
4.9 TREASURER. The Treasurer will have the care and custody of all the
---------
funds and securities of the Company that may come into his hands as Treasurer,
and the power and authority to endorse checks, drafts and other instruments for
the payment of money for deposit or collection when necessary or proper and to
deposit the same to the credit of the Company in such bank or banks or
depository as the Board of Directors or the executive committee, or the officers
or agents to whom the Board of Directors or the executive committee may delegate
such authority, may designate, and he may endorse all commercial documents
requiring endorsements for or on behalf of the Company. He may sign all
receipts and vouchers for the payments made to the Company. He will render an
account of his transactions to the Board of Directors or to the executive
committee as often as the board or the committee will require the same. He will
enter regularly in the books to be kept by him for that purpose full and
adequate account of all moneys received and paid by him on account of the
Company. He will perform all acts incident to the position of Treasurer,
subject to the control of the Board of Directors and of the executive committee.
He will when requested, pursuant to vote of the Board of Directors or the
executive committee, give a bond to the Company conditioned for the faithful
performance of his duties, the expense of which bond will be borne by the
Company.
4.10 SECRETARY. The Secretary will keep the minutes of all meetings of
---------
the Board of Directors and of the stockholders; he will attend to the giving and
serving of all notices of the Company. Except as otherwise ordered by the Board
of Directors or the executive committee, he will attest the seal of the Company
upon all contracts and instruments executed under such seal and will affix the
seal of the Company thereto and to all certificates of shares of capital stock
of the Company. He will have charge of the stock certificate book, transfer
book and stock ledger, and such other books and papers as the Board of Directors
or the executive committee may direct. He shall, in general, perform all the
duties of Secretary, subject to the control of the Board of Directors and of the
executive committee.
4.11 ASSISTANT SECRETARY. The Board of Directors or any two of the
-------------------
officers of the Company acting jointly may appoint or remove one or more
Assistant Secretaries of the Company. Any Assistant Secretary upon his
appointment will perform such duties of the Secretary, and also any and all such
other duties as the executive committee or the Board of Directors or the
President or the Executive Vice-President or the Treasurer or the Secretary may
designate.
<PAGE>
-13-
4.12 ASSISTANT TREASURER. The Board of Directors or any two of the
-------------------
officers of the Company acting jointly may appoint or remove one or more
Assistant Treasurers of the Company. Any Assistant Treasurer upon his
appointment will perform such of the duties of the Treasurer, and also any and
all such other duties as the executive committee or the Board of Directors or
the President or the Executive Vice-President or the Treasurer or the Secretary
may designate.
4.13 SUBORDINATE OFFICERS. The Board of Directors may select such
--------------------
subordinate officers as it may deem desirable. Each such officer will hold
office for such period, have such authority, and perform such duties as the
Board of Directors may prescribe. The Board of Directors may, from time to
time, authorize any officer to appoint and remove subordinate officers and to
prescribe the powers and duties thereof.
ARTICLE V - STOCK.
-----------------
5.1 STOCK. Each stockholder will be entitled to a certificate or
-----
certificates of stock of the Company in such form as the Board of Directors may
from time to time prescribe. The certificates of stock of the Company will be
numbered and will be entered in the books of the Company as they are issued.
They will certify the holder's name and number and class of shares and will be
signed by both of (i) either the President or a Vice-President, and (ii) any one
of the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary, and will be sealed with the corporate seal of the Company. If such
certificate is countersigned (l) by a transfer agent other than the Company or
its employee, or, (2) by a registrar other than the Company or its employee, the
signature of the officers of the Company and the corporate seal may be
Facsimiles. In case any officer or officers who will have signed, or whose
facsimile signature or signatures will have been used on, any such certificate
or certificates will cease to be such officer or officers of the Company,
whether because of death, resignation or otherwise, before such certificate or
certificates will have been delivered by the Company, such certificate or
certificates may nevertheless be adopted by the Company and be issued and
delivered as though the person or persons who signed such certificate or
certificates or whose facsimile signature will have been used thereon had not
ceased to be such officer or officers of the Company.
5.2 FRACTIONAL SHARE INTERESTS. The Company may, but will not be required
--------------------------
to, issue fractions of a share. If the Company does not issue fractions of a
share, it will (i) arrange for the disposition of fractional interests by those
entitled thereto, (ii) pay in cash the fair value of fractions of a share as of
the time when those entitled to receive such
<PAGE>
-14-
fractions are determined, or (iii) issue scrip or warrants in registered or
bearer form that will entitle the holder to receive a certificate for a full
share upon the surrender of such scrip or warrants aggregating a full share. A
certificate for a fractional share shall, but scrip or warrants will not unless
otherwise provided therein, entitle the holder to exercise voting rights, to
receive dividends thereon, and to participate in any of the assets of the
Company in the event of liquidation. The Board of Directors may cause scrip or
warrants to be issued subject to the conditions that they will become void if
not exchanged for certificates representing full shares before a specified date,
or subject to the conditions that the shares for which scrip or warrants are
exchangeable may be sold by the Company and the proceeds thereof distributed to
the holders of scrip or warrants, or subject to any other conditions which the
Board of Directors may impose.
5.3 TRANSFERS OF STOCK. Subject to any transfer restrictions then in
------------------
force, the shares of stock of the Company will be transferable only upon its
books by the holders thereof in person or by their duly authorized attorneys or
legal representatives and upon such transfer the old certificates will be
surrendered to the Company by the delivery thereof to the person in charge of
the stock and transfer books and ledgers or to such other person as the
directors may designate by whom they will be canceled and new certificates will
thereupon be issued. The Company will be entitled to treat the holder of record
of any share or shares of stock as the holder in fact thereof and accordingly
will not be bound to recognize any equitable or other claim to or interest in
such share on the part of any other person whether or not it will have express
or other notice thereof save as expressly provided by the laws of Delaware.
5.4 RECORD DATE. For the purpose of determining the stockholders entitled
-----------
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or the
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion, or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, that will not
be more than sixty (60) days nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action. If no such
record date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders will
be at the close of business on the day next preceding the day on that notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; the record date for determining
stockholders entitled to express consent to corporate action in writing without
a
<PAGE>
-15-
meeting, when no prior action by the Board of Directors is necessary, will be
the day on which the first written consent is expressed; and the record date for
determining stockholders for any other purpose will be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto. A determination of stockholders of record entitled to notice of or to
vote at any meeting of stockholders will apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
5.5 TRANSFER AGENT AND REGISTRAR. The Board of Directors may appoint one
----------------------------
or more transfer agents or transfer clerks and one or more registrars and may
require all certificates of stock to bear the signature or signatures of any of
them.
5.6 DIVIDENDS.
---------
1. Power to Declare. Dividends upon the capital stock of the Company,
----------------
subject to the provisions of the Certificate of Incorporation, if any, may
be declared by the Board of Directors at any regular or special meeting,
pursuant to law. Dividends may be paid in cash, in property, or in shares
of the capital stock, subject to the provisions of the Certificate of
Incorporation and the laws of Delaware.
2. Reserves. Before payment of any dividend, there may be set aside
--------
out of any funds of the Company available for dividends such sum or sums as
the directors from time to time, in their absolute discretion, think proper
as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Company, or
for such other purpose as the directors will think conducive to the
interest of the Company, and the directors may modify or abolish any such
reserve in the manner in which it was created.
5.7 LOST, STOLEN OR DESTROYED CERTIFICATES. No certificates for shares of
--------------------------------------
stock of the Company will be issued in place of any certificate alleged to have
been lost, stolen, or destroyed, except upon production of such evidence of the
loss, theft, or destruction and upon indemnification of the Company and its
agents to such extent and in such manner as the Board of Directors may from time
to time prescribe.
5.8 INSPECTION OF BOOKS. The stockholders of the Company, by a majority
-------------------
vote at any meeting of stockholders duly called, or in case the stockholders
will fail to act, the Board of Directors will have power from
<PAGE>
-16-
time to time to determine whether and to what extent and at what times and
places and under what conditions and regulations the accounts and books of the
Company (other than the stock ledger) or any of them, will be open to inspection
of stockholders; and no stockholder will have any right to inspect any account
or book or document of the Company except as conferred by statute or authorized
by the Board of Directors or by a resolution of the stockholders.
ARTICLE VI - MISCELLANEOUS MANAGEMENT PROVISIONS.
------------------------------------------------
6.1 CHECKS, DRAFTS AND NOTES. All checks, drafts, or orders for the
------------------------
payment of money, and all notes and acceptances of the Company will be signed by
such officer or officers, or such agent or agents, as the Board of Directors may
designate.
6.2 NOTICES.
-------
1. Notices to directors may, and notices to stockholders shall, be in
writing and delivered personally or mailed to the directors or stockholders
at their addresses appearing on the books of the Company. Notice by mail
will be deemed to be given at the time when the same will be mailed. Notice
to directors may also be given by telegram, telecopy or orally, by
telephone or in person.
2. Whenever any notice is required to be given under the provisions
of the statutes or of the Certificate of Incorporation of the Company of
the Company or of these by-laws, a written waiver of notice, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein or the meeting or action to which such notice relates, will
be deemed equivalent to notice. Attendance of a person at a meeting will
constitute a waiver of notice of such meeting except when the person
attends a meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened.
6.3 CONFLICT OF INTEREST. No contract or transaction between the Company
--------------------
and one or more of its directors or officers, or between the Company and any
other Company, partnership, association, or other organization in which one or
more of its directors or officers are directors or officers, or have a financial
interest, will be void or voidable solely for this reason, or solely because the
director or officer is present at or participates in the meeting of the board of
or committee thereof that authorized the contract or transaction, or solely
because his or their votes
<PAGE>
-17-
are counted for such purpose, if: (i) the material facts as to his relationship
or interest and as to the contract or transaction are disclosed or are known to
the Board of Directors or the committee and the board or committee in good faith
authorizes the contract or transaction by the affirmative vote of a majority of
the disinterested directors, even though the disinterested directors be less
than a quorum; or (ii) the material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the stockholders
of the Company entitled to vote thereon, and the contract or transaction as
specifically approved in good faith by vote of such stockholders; or (iii) the
contract or transaction is fair as to the Company as of the time it is
authorized, approved or ratified, by the Board of Directors, a committee or the
stockholders. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
that authorizes the contract or transaction.
6.4 VOTING OF SECURITIES OWNED BY THIS COMPANY. Subject always to the
------------------------------------------
specific directions of the Board of Directors, (i) any shares or other
securities issued by any other company and owned or controlled by the company
may be voted in person at any meeting of security holders of such other company
by the President of the Company if he is present at such meeting, or in his
absence by the Treasurer of the Company if he is present at such meeting, and
(ii) whenever, in the judgment of the President, it is desirable for the Company
to execute a proxy or written consent in respect to any shares or other
securities issued by any other company and owned by the Company, such proxy or
consent will be executed in the name of the Company by the President, without
the necessity of any authorization by the Board of Directors, affixation of
corporate seal or countersignature or attestation by another officer, provided
that if the President is unable to execute such proxy or consent by reason of
sickness, absence from the United States or other similar cause, the Treasurer
may execute such proxy or consent. Any person or persons designated in the
manner above stated as the proxy or proxies of the Company will have full right,
power and authority to vote the shares or other securities issued by such other
Company and owned by the Company the same as such shares or other securities
might be voted by the Company.
ARTICLE VII - INDEMNIFICATION.
-----------------------------
7.1 RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is
------------------------
threatened to be made a party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of being or having been a director
<PAGE>
-18-
or officer of the Company or serving or having served at the request of the
Company as a director, trustee, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (an "Indemnitee"),
whether the basis of such proceeding is alleged action or failure to act in an
official capacity as a director, trustee, officer, employee or agent or in any
other capacity while serving as a director, trustee, officer, employee or agent,
will be indemnified and held harmless by the Company to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Company to provide broader indemnification
rights than permitted prior thereto) (as used in this Article 7, the "Delaware
Law"), against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) reasonably incurred or suffered by such Indemnitee in connection
therewith and such indemnification will continue as to an Indemnitee who has
ceased to be a director, trustee, officer, employee or agent and will inure to
the benefit of the Indemnitee's heirs, executors and administrators; provided,
however, that, except as provided in (S)7.2 hereof with respect to Proceedings
to enforce rights to indemnification, the Company will indemnify any such
Indemnitee in connection with a Proceeding (or part thereof) initiated by such
Indemnitee only if such Proceeding (or part thereof) was authorized by the board
of directors of the Company. The right to indemnification conferred in this
Article 7 will be a contract right and will include the right to be paid by the
Company the expenses (including attorneys' fees) incurred in defending any such
Proceeding in advance of its final disposition (an "Advancement of Expenses");
provided, however, that, if the Delaware Law so requires, an Advancement of
Expenses incurred by an Indemnitee will be made only upon delivery to the
Company of an undertaking (an "Undertaking"), by or on behalf of such
Indemnitee, to repay all amounts so advanced if it will ultimately be determined
by final judicial decision from which there is no further right to appeal (a
"Final Adjudication") that such Indemnitee is not entitled to be indemnified for
such expenses under this Article 7 or otherwise.
7.2 RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under (S)7.1 hereof is
---------------------------------
not paid in full by the Company within sixty days after a written claim has been
received by the Company, except in the case of a claim for an Advancement of
Expenses, in which case the applicable period will be twenty days, the
Indemnitee may at any time thereafter bring suit against the Company to recover
the unpaid amount of the claim. If successful in whole or in part in any such
suit, or in a suit brought by the
<PAGE>
-19-
Company to recover an Advancement of Expenses pursuant to the terms of an
Undertaking, the Indemnitee will be entitled to be paid also the expense of
prosecuting or defending such suit. In (i) any suit brought by the Indemnitee to
enforce a right to indemnification hereunder (but not in a suit brought by the
Indemnitee to enforce a right to an Advancement of Expenses) it will be a
defense that, and (ii) in any suit by the Company to recover an Advancement of
Expenses pursuant to the terms of an Undertaking the Company will be entitled to
recover such expenses upon a Final Adjudication that, the Indemnitee has not met
the applicable standard of conduct set forth in the Delaware Law. Neither the
failure of the Company (including its board of directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the Indemnitee is proper in
the circumstances because the Indemnitee has met the applicable standard of
conduct set forth in the Delaware Law, nor an actual determination by the
Company (including its board of directors, independent legal counsel, or its
stockholders) that the Indemnitee has not met such applicable standard of
conduct, will create a presumption that the Indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to
enforce a right to indemnification or to an Advancement of Expenses hereunder,
or by the Company to recover an Advancement of Expenses pursuant to the terms of
an Undertaking, the burden of proving that the Indemnitee is not entitled to be
indemnified, or to such Advancement of Expenses, under this Article 7 or
otherwise will be on the Company.
7.3 NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and to the
-------------------------
Advancement of Expenses conferred in this Article 7 will not be exclusive of any
other right that any person may have or hereafter acquire under any statute, the
Company's Certificate of Incorporation, by-law, agreement, vote of stockholders
or disinterested directors or otherwise.
7.4 INSURANCE. The Company may maintain insurance, at its expense, to
---------
protect itself and any director, officer, employee or agent of the Company or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Company would have
the power to indemnify such person against such expense, liability or loss under
this Article 7 or under the Delaware Law.
7.5 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE COMPANY. The Company
------------------------------------------------------
may, to the extent authorized from time to time by the Board of Directors, grant
rights to indemnification, and to the Advancement of Expenses, to any employee
or agent of the Company to
<PAGE>
-20-
the fullest extent of the provisions of this Article 7 with respect to the
indemnification and Advancement of Expenses of directors and officers of the
Company.
ARTICLE VIII - AMENDMENTS.
-------------------------
8.1 AMENDMENTS. Subject always to any limitations imposed by the Company's
----------
Certificate of Incorporation, from and after the closing of the IPO, these By-
laws may be altered, amended or repealed or new By-laws may be adopted, only by
(i) affirmative vote of the holders of at least a majority of the shares of the
Company's stock entitled to vote for the election of directors, provided, that
the affirmative vote of the holders of at least 67% of the shares of the
Company's stock entitled to vote for the election of directors shall be required
for any such alteration, amendment, repeal, or adoption that would affect or be
inconsistent with the provisions of Sections 2.11, 2.12, or 3.1(c) or this
Section 8.1 (in each case, in addition to any separate class vote that may be
required pursuant to the terms of any then outstanding preferred stock of the
Company), or (ii) by unanimous vote or consent of the Board of Directors duly
adopted by all of the directors of the Company.
<PAGE>
EXHIBIT 4.1
Common Stock Common Stock
[ROWECOM INC. LOGO]
RoweCom Inc.
incorporated under the laws
of the state of Delaware
This certifies that CUSIP ------------
is the registered owner of
fully paid and non-assessable shares of the $.01 par value common stock of
RoweCom Inc.
Transferable on the books of the Corporation by the holder hereof in person
or by a duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
DATED:
/s/ Louis Hernandez, Jr. [seal of Rowecom] /s/ Richard R. Rowe
Louis Hernandez, Jr. Richard R. Rowe
Treasurer and Chief Financial President and
Officer Chief Executive
Officer
<PAGE>
ROWECOM INC.
The Corporation is authorized to issue two classes of stock, Common and
Preferred Stock. The Board of Directors of the Corporation has authority to fix
the number of shares and the designation of any series of Preferred Stock and to
determine or alter the rights, preferences, privileges and restrictions granted
to or imposed upon any unissued series of Preferred Stock.
A statement of the rights, preferences, privileges and restrictions granted
to or imposed upon the respective classes or series of shares and upon the
holders thereof as established, from time to time, by the Third Amended and
Restated Certificate of Incorporation of the Corporation and by any certificate
of designations, and the number of shares constituting each class and series and
the designations thereof, may be obtained by the holder hereof upon written
request and without charge from the Corporation at its office in Cambridge
Massachusetts.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNF GIFT MIN ACT - .................Custodian...............
TEN ENT - as tenants by the agencies (cust) (Minor)
JT TEN - as joint tenants with under Uniform Gifts to Minors
right of survivorship and is .....................................
not as tenants in (State)
common UNF TRN MIN ACT - .............Custodian (until age........)
(Cust)
..................under Uniform Transfer
(Name)
to Minors Act.............................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list
FOR VALUE RECEIVED, ________________________________ hereby sells, assigns
and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
_______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and does hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ______________________________
X _____________________________________________
X _____________________________________________
NOTICE THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT ON ANY CAUSE
WHATEVER.
Signature(s) Guaranteed
By ________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION BANKS
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATION
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEED MEDALLION
PROGRAM, PURSUANT TO S.E.C. RULE 17A.D.-15.
<PAGE>
EXHIBIT 5.1
BINGHAM DANA LLP
150 Federal Street
Boston, MA 02110
March 3, 1999
RoweCom Inc.
725 Concord Avenue
Cambridge, Massachusetts 02138
Re: Registration Statement on Form S-1 (SEC File No. 333-68761)
Ladies and Gentlemen:
We have acted as counsel to RoweCom Inc. (the "Company"), a Delaware
corporation, in connection with the registration under the Securities Act of
1933, as amended (the "Act"), of 3,565,000 shares (the "Shares") of Common
Stock, $0.01 par value per share, pursuant to a Registration Statement on Form
S-1, Registration No. 333-68761 (as amended from time to time, the
"Registration Statement"), initially filed by the Company with the Securities
and Exchange Commission on December 11, 1998.
We have reviewed the corporate proceedings taken by the Company with respect
to the authorization of the issuance of the Shares. We have also examined and
relied upon originals or copies, certified or otherwise authenticated to our
satisfaction, of such agreements, instruments, corporate records, and other
documents, and certificates of officers of the Company as to certain factual
matters, and have made such investigation of law, and have discussed with
officers and representatives of the Company such questions of fact, as we have
deemed necessary or appropriate to enable us to express the opinions rendered
hereby.
We have assumed the genuineness of all signatures, the conformity to the
originals of all documents reviewed by us as copies, the authenticity and
completeness of all original documents reviewed by us in original or copy form,
and the legal competence of each individual executing a document.
We have also assumed that an Underwriting Agreement substantially in the form
of Exhibit 1.1 to the Registration Statement, by and among the Company and the
underwriters named therein (the "Underwriting Agreement"), will have been duly
executed and delivered pursuant to the authorizing votes of the Board of
Directors of the Company, and that the Shares will be issued and sold only upon
full payment therefor as provided in the Underwriting Agreement. We have
further assumed that the registration requirements of the Act and all
applicable requirements of state laws regulating the sale of securities will
have been duly satisfied.
This opinion is limited solely to the General Corporation Law of the State of
Delaware, as applied by courts located in Delaware.
Based upon the foregoing, we are of the opinion that the Shares have been
duly authorized, and when delivered and paid for in accordance with the
provisions of the Underwriting Agreement, will be validly issued, fully paid,
and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus included in the Registration Statement.
Very truly yours,
/s/ Bingham Dana LLP
BINGHAM DANA LLP
<PAGE>
Exhibit 10.1
ROWECOM INC.
1997 STOCK INCENTIVE PLAN
1. Purposes of the Plan.
The purposes of this 1997 Stock Incentive Plan of RoweCom Inc. (the
"Company") are to promote the interests of the Company and its stockholders by
strengthening the Company's ability to attract, motivate, and retain officers,
directors, employees, and consultants of exceptional ability and to provide a
means to encourage stock ownership and a proprietary interest in the Company to
selected officers, directors, employees, and consultants of the Company upon
whose judgment, initiative, and efforts the financial success and growth of the
business of the Company largely depend.
2. Definitions.
(a) "Board" means the Board of Directors of the Company.
(b) "Committee" means the Compensation Committee of the Board; provided,
that the Board by resolution duly adopted may at any time or from time to time
determine to assume any or all of the functions of the Committee under the Plan,
and during the period of effectiveness of any such resolution, references herein
to the "Committee" will mean the Board acting in such capacity.
(c) "Common Stock" means the Common Stock, $0.01 par value, of the Company.
(d) "Company" means RoweCom Inc., a Delaware corporation.
(e) "Eligible Person" means any person who, at the time of the grant of an
Option or Restricted Stock Award, is an officer, director, employee, or
consultant of the Company or any Subsidiary.
(f) "Fair Market Value" means the value of a share of Common Stock as of
the relevant time of reference, as determined as follows. If the Common Stock
is then publicly traded, Fair Market Value will be (i) the last sale price, on
the preceding business day, of a share of Common Stock on the principal national
securities exchange on which the Common Stock is traded, if the Common Stock is
then traded on a national securities exchange; or (ii) the last sale price, on
the preceding business day, of the Common Stock reported in
<PAGE>
The NASDAQ Stock Market's National Market, if the Common Stock is not then
traded on a national securities exchange; or (iii) the average of the closing
bid and asked prices, on the preceding business day, for the Common Stock quoted
by an established quotation service for over-the-counter securities, if the
Common Stock is not then traded on a national securities exchange or reported in
The NASDAQ Stock Market's National Market. If the Common Stock is not then
publicly traded, Fair Market Value will be the fair value of a share of the
Common Stock as determined by the Board or the Committee, taking into
consideration such factors as it deems appropriate, which may include recent
sale and offer prices of Common Stock in arms'-length transactions.
(g) "Participant" means any Eligible Person selected to receive an Option
or Restricted Stock Award pursuant to Section 5.
(h) "Restricted Stock Award" means a right to the grant or purchase, at a
price determined by the Committee, of Common Stock which is nontransferable and
subject to substantial risk of forfeiture until specific conditions of
continuing employment or other performance are met.
(i) "Incentive Stock Option" means an Option intended to qualify as an
"incentive stock option" under Section 422A of the Internal Revenue Code and
regulations thereunder.
(j) "Option" means an Incentive Stock Option or a nonqualified stock
option.
(k) "Plan" means this 1997 Stock Incentive Plan, as it may be amended
and/or restated and in effect from time to time.
(l) "Subsidiary" means any subsidiary corporation (as defined in Section
425 of the Internal Revenue Code) of the Company.
3. Shares of Common Stock Subject to the Plan.
(a) Subject to adjustment in accordance with the provisions of Section 3(c)
and Section 8 of the Plan, the aggregate number of shares of Common Stock that
may be issued or transferred pursuant to Options or Restricted Stock Awards
under the Plan will not exceed an aggregate of 330,371 shares.
(b) The shares of Common Stock to be delivered under the Plan will be made
available, at the discretion of the Committee, from authorized but unissued
shares of Common Stock and/or from previously issued shares of Common Stock
reacquired by the Company.
<PAGE>
(c) If shares covered by any Option cease to be issuable for any reason,
and/or shares covered by Restricted Stock Awards are forfeited, such number of
shares will no longer be charged against the limitation provided in Section 3(a)
and may again be made subject to Options or Restricted Stock Awards.
4. Administration of the Plan.
(a) The Plan will be governed by and interpreted and construed in
accordance with the internal laws of the State of Delaware (without reference to
principles of conflicts or choice of law). The captions of sections of the Plan
are for reference only and will not affect the interpretation or construction of
the Plan.
(b) The Plan will be administered by the Committee, which will consist of
two or more persons. The Committee has and may exercise such powers and
authority of the Board as may be necessary or appropriate for the Committee to
carry out its functions as described in the Plan. The Committee will determine
the Eligible Persons to whom, and the time or times at which, Options or
Restricted Stock Awards may be granted and the number of shares subject to each
Option or Restricted Stock Award. The Committee also has authority (i) to
interpret the Plan, (ii) to determine the terms and provisions of the Option or
Restricted Stock Award instruments, and (iii) to make all other determinations
necessary or advisable for Plan administration. The Committee has authority to
prescribe, amend, and rescind rules and regulations relating to the Plan. All
interpretations, determinations, and actions by the Committee will be final,
conclusive, and binding upon all parties.
(c) No member of the Committee will be liable for any action taken or
determination made in good faith by the Committee with respect to the Plan or
any Option or Restricted Stock Award under it.
5. Grants.
(a) The Committee will determine and designate from time to time those
Eligible Persons who are to be granted Options or Restricted Stock Awards, the
type of each Option to be granted (provided, that no Incentive Stock Option may
be granted to any person who is not then an employee of the Company) and the
number of shares covered thereby or issuable upon exercise thereof, and the
number of shares covered by each Restricted Stock Award. Each Option and
Restricted Stock Award will be evidenced by a written agreement or instrument
and may include any other terms and conditions not inconsistent with the Plan,
as the Committee may determine.
<PAGE>
(b) No person will be eligible for the grant of an Incentive Stock Option
who owns or would own immediately before the grant of such Option, directly or
indirectly, stock possessing more than ten percent of the total combined voting
power of all classes of stock of the Company or of any parent corporation or
Subsidiary of the Company. This will not apply if, at the time such Incentive
Stock Option is granted, its exercise price is at least 110% of the Fair Market
Value of the Common Stock and by its terms, it is not exercisable after the
expiration of five years from the date of grant. Subject to adjustment in
accordance with the provisions of Section 8 of the Plan, (i) no person may in
any year be granted Options or Restricted Stock Awards with respect to more than
150,000 shares of Common Stock, and (ii) no more than an aggregate of 330,371
shares of Common Stock may be issued pursuant to the exercise of Incentive Stock
Options granted under the Plan.
6. Terms and Conditions of Stock Options.
(a) The price at which Common Stock may be purchased by a Participant under
an Option will be determined by the Committee; provided, however, that the
purchase price under an Incentive Stock Option will not be less than 100% (110%,
in the case of an Incentive Stock Option granted to a greater-than-10%
stockholder) of the Fair Market Value of the Common Stock on the date of grant
of such Option.
(b) Each Option will be exercisable at such time or time, during such
periods, and for such numbers of shares as is determined by the Committee and
set forth in the agreement or instrument evidencing the Option grant (subject to
acceleration by the Committee, in its discretion; provided, that each
outstanding Option granted to an officer, director, or employee of the Company
will vest and become exercisable in its entirety immediately prior to the
closing of any sale of the Company or its business (whether by merger,
consolidation, sale of all or substantially all assets or capital stock, or
otherwise). An Incentive Stock Option will expire no later than three months
following termination of the optionee's employment relationship with the Company
or a Subsidiary, except in the event that such termination is due to death or
disability, in which case the Option may be exercisable for a maximum of twelve
months after such termination. In any event, an Option will expire no later
than the tenth anniversary of the date of grant.
<PAGE>
(c) Unless the Compensation Committee otherwise determines (whether at the
time the Option is granted or otherwise), upon the exercise of an Option, the
purchase price will be payable in full in cash.
(d) Incentive Stock Options may be granted under the Plan only to employees
of the Company or a Subsidiary, and the aggregate Fair Market Value (determined
as of the date the Incentive Stock Option is granted) of the number of shares
with respect to which Incentive Stock Options are exercisable for the first time
by a Participant in any calendar year will not exceed one hundred thousand
dollars ($100,000) or such other limit as may be imposed by the Internal Revenue
Code. Any Options that purport to be Incentive Stock Options but which are
granted to persons other than employees of the Company or a Subsidiary will be,
and any Options that purport to be Incentive Stock Options but are granted in
amounts in excess of those specified in this Section 6(d), will to the extent of
such excess be, nonqualified Options.
(e) No fractional shares will be issued pursuant to the exercise of an
Option, nor will any cash payment be made in lieu of fractional shares.
7. Terms and Conditions of Restricted Stock Awards.
(a) All shares of Common Stock subject to Restricted Stock Awards granted
or sold pursuant to the Plan may be issued or transferred for such consideration
(which may consist wholly of services) as the Committee may determine, and will
be subject to the following conditions:
(i) The shares may not be sold, transferred, or otherwise alienated or
hypothecated until the restrictions are removed or expire, unless the
Committee determines otherwise.
(ii) The Committee may provide in the agreement or instrument
evidencing the grant of the Restricted Stock Awards that the certificates
representing shares subject to Restricted Stock Awards granted or sold
pursuant to the Plan will be held in escrow by the Company until the
restrictions on the shares lapse in accordance with the provisions of
subsection (b) of this Section 7.
(iii) Each certificate representing shares subject to Restricted Stock
Awards granted or sold pursuant to the Plan will bear a legend making
appropriate reference to the restrictions imposed.
(iv) The Committee may impose other conditions on any shares subject to
Restricted Stock Awards granted or sold pursuant to the Plan
<PAGE>
as it may deem advisable, including without limitation, restrictions under
the Securities Act of 1933, as amended, under the requirements of any stock
exchange or securities quotations system upon which such shares or shares
of the same class are then listed, and under any blue sky or other
securities laws applicable to such shares.
(b) The restrictions imposed under subparagraph (a) above upon Restricted
Stock Awards will lapse at such time or times, and/or upon the achievement of
such predetermined performance objectives, as is determined by the Committee and
set forth in the agreement or instrument evidencing the Restricted Stock Award,
subject to acceleration by the Committee, in its discretion; provided, that with
respect to each outstanding Restricted Stock Award granted to an officer,
director, or employee of the Company, all such restrictions (other than those is
clause (iv)) will lapse in their entirety immediately prior to the closing of
any sale of the Company or its business (whether by merger, consolidation, sale
of all or substantially all assets or capital stock, or otherwise). In the
event a holder of a Restricted Stock Award ceases to be an officer, director,
employee, or consultant (as the case may be) of the Company, all shares under
the Restricted Stock Award that remain subject to restrictions at the time his
or her officership, directorship, employment, or consulting relationship
terminates will be returned to or repurchased by the Company unless the
Committee determines otherwise.
(c) Subject to the provisions of subparagraphs (a) and (b) above, the
holder will have all rights of a shareholder with respect to the shares covered
by Restricted Stock Awards granted or sold, including the right to receive all
dividends and other distributions paid or made with respect thereto; provided,
however, that he or she will execute an irrevocable proxy or enter into a voting
agreement with the Company as determined by the Committee for the purpose of
granting the Company or its nominee the right to vote all shares that remain
subject to restrictions under this Section 7 in the same proportions (for and
against) as the outstanding voting shares of the Company that are not subject to
such restrictions are voted by the other shareholders of the Company on any
matter, unless the Committee determines otherwise.
8. Adjustment Provisions.
(a) Subject to Section 8(b), if the outstanding shares of Common Stock of
the Company are increased, decreased, or exchanged for a different number or
kind of shares or other securities, or if additional shares or new or different
shares or other securities are distributed with respect to such shares of Common
Stock or other securities, through merger, consolidation, sale of all or
substantially all the property of the Company, reorganization, recapitalization,
<PAGE>
reclassification, stock dividend, stock split, reverse stock split, or other
distribution with respect to such shares of Common Stock, or other securities,
an appropriate and proportionate adjustment will be made in (i) the maximum
numbers and kinds of shares provided in Sections 3 and 5, (ii) the numbers and
kinds of shares or other securities subject to the then outstanding Options and
Restricted Stock Awards, and (iii) the price for each share or other unit of any
other securities subject to then outstanding Options (without change in the
aggregate purchase price as to which such Options remain exercisable).
(b) Adjustments under this Section 8 will be made by the Committee in
accordance with the terms hereof, whose determination as to what adjustments
will be made and the extent thereof so as to effectuate the intent of such
sections will be final, binding, and conclusive. The Company may, but will not
be required to, issue fractional shares by reason of any such adjustments.
<PAGE>
9. General Provisions.
(a) Nothing in the Plan or in any instrument executed pursuant to the Plan
will confer upon any Participant any right to continue in the employ of or as an
officer or director of or consultant to the Company or any of its Subsidiaries
or affect the right of the Company or any Subsidiary to terminate the
employment, officership, directorship, or consulting relationship of any
Participant at any time, with or without cause.
(b) No shares of Common Stock will be issued or transferred pursuant to an
Option or Restricted Stock Award unless and until all then applicable
requirements imposed by federal and state securities and other laws, rules and
regulations and by any regulatory agencies having jurisdiction, and by any stock
exchanges or securities quotations systems upon which the Common Stock may be
listed, have been fully met. As a condition precedent to the issuance of shares
pursuant to the grant or exercise of an Option or Restricted Stock Award, the
Company may require the Participant to take any reasonable action to meet such
requirements.
(c) No Participant and no beneficiary or other person claiming under or
through such Participant will have any right, title, or interest in or to any
shares of Common Stock allocated or reserved under the Plan or subject to any
Option, except as to such shares of Common Stock, if any, that have been issued
or transferred to such Participant.
(d) The Committee will adopt rules regarding the withholding of federal,
state, or local taxes of any kind required by law to be withheld with respect to
payments and delivery of shares to Participants under the Plan. With respect to
any nonqualified stock option, the Committee, in its discretion, may permit the
Participant to satisfy, in whole or in part, any tax withholding obligation that
may arise in connection with the exercise of the nonqualified stock option by
electing to have the Company withhold shares of Common Stock having a Fair
Market Value equal to the amount of the tax withholding.
(e) With the consent of the Committee, Options and Restricted Stock Awards
granted under the Plan may be transferred by a Participant to family members
and/or trusts for their benefit for bona fide estate-planning purposes. Except
for the foregoing, no Option and no right under the Plan, contingent or
otherwise, will be transferable or assignable or subject to any encumbrance,
pledge, or charge of any nature, except that a beneficiary may be designated
with respect to an Option in the event of death of a Participant, and if such
beneficiary is the executor or administrator of the estate of the Participant,
any rights with respect to such Option may be transferred to the person or
persons or entity (including a trust) entitled thereto under the will of the
holder of such Option.
<PAGE>
(f) The Committee may cancel, with the consent of the Participant, all or a
portion of any Option granted under the Plan to be conditioned upon the granting
to the Participant of a new Option for the same or a different number of shares
as the Option surrendered, or may require such voluntary surrender as a
condition to a grant of a new Option to such Participant; in the case of an
Incentive Stock Option, such new Options, if Incentive Stock Options, to have an
exercise price per share based upon the Fair Market Value of the Common Stock as
of the new grant date (i.e., the purchase price under a new Incentive Stock
Option will not be less than 100% of the Fair Market Value of the Common Stock
on the date of grant of such new Incentive Stock Option (110%, if the grantee of
such new Incentive Stock Option is a greater-than-10% stockholder of the
Company, as set forth in Section 5(b) above)). Subject to the provisions of
Section 6(d), such new Option will be exercisable at such time or time, during
such periods, and for such numbers of shares, and in accordance with any other
terms or conditions, as are specified by the Committee at the time the new
Option is granted, all determined in accordance with the provisions of the Plan
without regard to the price, period of exercise, or any other terms or
conditions of the Option surrendered.
(g) The written agreements or instruments evidencing Restricted Stock
Awards or Options granted under the Plan may contain such other provisions as
the Committee may deem advisable. Without limiting the foregoing, and if so
authorized by the Committee, the Company may, with the consent of the
Participant and at any time or from time to time, cancel all or a portion of any
Option granted under the Plan then subject to exercise and discharge its
obligation with respect to the Option either by payment to the Participant of an
amount of cash equal to the excess, if any, of the Fair Market Value, at such
time, of the shares subject to the portion of the Option so canceled over the
aggregate purchase price specified in the Option covering such shares, or by
issuance or transfer to the Participant of shares of Common Stock with a Fair
Market Value at such time, equal to any such excess, or by a combination of cash
and shares. Upon any such payment of cash or issuance of shares, (i) there will
be charged against the aggregate limitations set forth in Section 3(a) a number
of shares equal to the number of shares so issued plus the number of shares
purchasable with the amount of any cash paid to the Participant on the basis of
the Fair Market Value as of the date of payment, and (ii) the number of shares
subject to the portion of the Option so canceled, less the number of shares so
charged against such limitations, will thereafter be available for other grants.
<PAGE>
10. Amendment and Termination.
(a) The Board will have the power, in its discretion, to amend, modify,
suspend, or terminate the Plan at any time, subject to the rights of holders of
outstanding Options and Restricted Stock Awards on the date of such action.
(b) The Committee may, with the consent of a Participant, make such
modifications in the terms and conditions of an Option or Restricted Stock Award
held by such Participant as it deems advisable.
(c) No amendment, suspension or termination of the Plan will, without the
consent of the Participant, alter, terminate, impair, or adversely affect any
right or obligation under any Option or Restricted Stock Award previously
granted to such Participant under the Plan.
11. Effective Date of Plan and Duration of Plan.
The effective date of the Plan is April 25, 1997, the date on which it was
approved by the Board. No option may be granted under the Plan after the tenth
anniversary of such effective date. Subject to the foregoing, options may be
granted under the Plan at any time subsequent to such effective date, provided,
however, that (a) no Incentive Option will be exercised or exercisable unless
the stockholders of the Company approve the Plan not later than one year from
such effective date, and (b) all Incentive Options, if any, issued prior to the
date of such stockholders' approval will contain a reference to such condition.
<PAGE>
EXHIBIT 10.2
ROWECOM INC.
1999 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
ARTICLE I
PURPOSE OF PLAN
This 1999 Non-Employee Director Stock Option Plan (this "Plan") is a stock
option plan pursuant to which options to purchase shares of the Common Stock,
$0.01 par value per share ("Common Stock"), of RoweCom Inc. (the "Company") will
be granted to non-employee directors of the Company. The purpose of this Plan
is to attract and retain the services as directors of the Company of qualified
persons who are not employees of the Company, to express the Company's
appreciation for their service as directors, and to provide them with additional
incentives to contribute to the future success of the Company's business.
ARTICLE II
DEFINITIONS
"Board" means the Board of Directors of the Company.
"Change in Control" means either of the following transactions:
(i) any person or group of persons (within the meaning of
Section 13(d)(3) of the Exchange Act), other than the Company or a
person that directly or indirectly controls, is controlled by, or is
under common control with the Company, directly or indirectly acquires
Beneficial Ownership of securities possessing more than 50% of the
total combined voting power of the Company's outstanding securities
pursuant to a tender or exchange offer made directly to the Company's
stockholders that the Board does not recommend such stockholders to
accept, or
(ii) over a period of 36 consecutive months or less, there is
a change in the composition of the Board such that a majority of the
Board members (rounded up to the next whole number, if a fraction)
ceases, by reason of one or more proxy contests for the election of
Board members, to be composed of individuals who either (A) have been
Board members continuously since the
<PAGE>
- 2 -
beginning of such period, or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in the preceding clause (A) who were still
in office at the time such election or nomination was approved by the
Board.
"Director" means a member of the Board who is not, and during the twelve
months preceding the relevant time of reference, has not been, an employee of
the Company or any of its subsidiaries.
"Fair Market Value" has the following meaning: If, at the time an Option
is granted under this Plan, the Common Stock is publicly traded, Fair Market
Value will be determined as of the date on which such Option is granted and will
be (i) the last sale price of a share of Common Stock on the principal national
securities exchange on which the Common Stock is traded, if the Common Stock is
then traded on a national securities exchange; or (ii) the last sale price of
the Common Stock reported in the NASDAQ National Market System, if the Common
Stock is not then traded on a national securities exchange; or (iii) the average
of the closing bid and asked prices for the Common Stock quoted by an
established quotation service for over-the-counter securities, if the Common
Stock is not then traded on a national securities exchange or reported in the
NASDAQ National Market System; provided, that in the case of the Options granted
hereunder on the date this Plan first becomes effective pursuant to Article X
hereof, Fair Market Value will be the initial public offering price at which
Shares are offered to the public pursuant to the registration statement referred
to in Article X. If the Common Stock is not publicly traded at the time an
Option is granted under this Plan, Fair Market Value will be the fair value of a
share of the Common Stock as determined by the Board, taking into consideration
such factors that as it deems appropriate, which may include recent sale and
offer prices of Common Stock in arms'-length private transactions.
"Option" means an option to purchase shares of Common Stock, granted under
this Plan.
"Option Agreement" means an agreement between the Company and an Optionee,
setting forth the terms and conditions of an Option.
"Optionee" means a person to whom an outstanding Option has been granted
under this Plan.
"Shares" means shares of Common Stock.
<PAGE>
- 3 -
ARTICLE III
SHARES AVAILABLE FOR OPTIONS
A. Maximum Number of Reserved Shares. The maximum number of Shares for
which Options may be issued under this Plan is 250,000 (subject to automatic
proportionate adjustment in the event of any stock dividend, stock split, stock
combination, recapitalization, or other similar event affecting the Common Stock
and occurring after February 5, 1999). In the event that an Option granted
under this Plan to any Optionee expires or is terminated unexercised as to any
Shares covered thereby, such Shares will thereafter again be available for
purposes of this Plan.
B. Adjustment of Number of Shares; Fractional Shares. In the event of
any stock dividend, stock split, stock combination, recapitalization, or other
similar event affecting the Common Stock, occurring after February 5, 1999, and
occurring after the date on which an Option is granted, the number and kind of
securities for which such Option may thereafter be exercised, and the exercise
price payable therefor, will be proportionately adjusted. Immediately prior to
the occurrence of any Acquisition or Change of Control, each Option will become
fully exercisable with respect to the total number of shares of Common Stock
subject to such Option. No fraction of a share of the Common Stock will be
purchasable or deliverable upon exercise of any Option, but in the event any
adjustment of the number of Shares covered by the Option causes such number to
include a fraction of a Share, such fraction will be adjusted to the nearest
smaller whole number of Shares.
ARTICLE IV
GRANTING OF OPTIONS
A. Automatic Grants.
(i) Each Director serving as such on the date this Plan becomes
effective in accordance with Article X hereof will automatically receive a
grant of Options to purchase 30,000 Shares (subject to automatic
proportionate adjustment in the event of any stock dividend, stock split,
stock combination, recapitalization, or other similar event affecting the
Common Stock and occurring after February 5, 1999); and each other person
who first becomes a Director subsequent to such date will automatically
receive a grant of Options to purchase 30,000 Shares (subject to automatic
proportionate adjustment in the event of any stock dividend, stock split,
stock combination, recapitalization, or other similar event affecting the
Common Stock and occurring after February 5, 1999).
<PAGE>
- 4 -
(ii) After a Director's initial grant of Options under this Plan, such
Director will receive, upon and as of each date on which such Director is
reelected as a Director of the Company (but not more frequently than once
every three years), an option to purchase a number of shares equal to the
excess of (A) 30,000 Shares (subject to automatic proportionate adjustment
in the event of any stock dividend, stock, stock combination,
recapitalization, or other similar event affecting the Common Stock and
occurring after February 5, 1999), over (B) the number of outstanding
Options previously granted to such Director under this Plan and in which
such Directors' rights have not yet vested.
(iii) Each Option granted pursuant to Section A(i) of this Article IV
will vest (i.e., become exercisable) ratably, at the rate of 10,000 Shares
(subject to automatic proportionate adjustment in the event of any stock
dividend, stock split, stock combination, recapitalization, or other
similar event affecting the Common Stock and occurring after February 5,
1999) per annum, on the last day of each calendar month ending after the
date such Option is granted; provided, that the Optionee continues to serve
as a Director of the Company as of each such vesting date.
Each Option granted pursuant to Section A(ii) of this Article IV will
vest ratably, at the rate of 10,000 Shares (subject to automatic
proportionate adjustment in the event of any stock dividend, stock split,
stock combination, recapitalization, or other similar event affecting the
Common Stock and occurring after February 5, 1999) per annum, on the last
day of each calendar month ending after the first date on which all
outstanding Options previously granted to such Director under this Plan
have fully vested; provided, that the Optionee continues to serve as a
Director of the Company as of each such vesting date.
(iv) No Options will be granted after the tenth anniversary of the
date on which this Plan first becomes effective in accordance with Article
X hereof.
B. Option Agreement. As soon as practicable after the grant of an Option
under this Plan, the Company and the Optionee will enter into a Stock Option
Agreement evidencing the Option so granted. Such agreement will be in such form
consistent with this Plan as the Board may deem appropriate.
<PAGE>
- 5 -
ARTICLE V
TERMS OF STOCK OPTIONS
The terms of Options granted under this Plan will be as follows:
(i) The per-share Option exercise price will be the Fair Market Value
of a Share on the date of grant.
(ii) With the consent of the Committee, Options may be transferred by
an Optionee to family members and/or trusts for their benefit for bona fide
estate-planning purposes. Except for the foregoing, no Option and no right
under the Plan, contingent or otherwise, will be transferable or assignable
or subject to any encumbrance, pledge, or charge of any nature, except that
a beneficiary may be designated with respect to an Option in the event of
death of an Optionee, and if such beneficiary is the executor or
administrator of the estate of the Optionee, any rights with respect to
such Option may be transferred to the person or persons or entity
(including a trust) entitled thereto under the will of the holder of such
Option.
(iii) Each Option will expire and all rights thereunder will end at
the expiration of ten years after the date on which it was granted, subject
in all cases to earlier termination as provided in this Plan or in the
Option Agreement relating to such Option.
(iv) If an Optionee ceases to be a Director for any reason, such
Optionee's Options will thereafter be exercisable only to the extent of the
purchase rights, if any, which have accrued as of the date of such
cessation of service as a director; and upon any such cessation of service
as a Director, such remaining rights to purchase will in any event
terminate upon the earlier of (A) the expiration of the original term of
the option, or (B) the second anniversary of such cessation of service.
ARTICLE VI
DELIVERY OF SHARES
Shares delivered upon the exercise of an Option will be Shares heretofore
or hereafter authorized and then unissued, or previously issued shares
heretofore or hereafter acquired through purchase in the open market or
otherwise, or some of each. No Optionee will have any rights as a stockholder
<PAGE>
- 6 -
of the Company (including without limitation any rights to vote or to receive
dividends or other distributions) in respect of Shares underlying any Option
unless and until such Option has been duly exercised and such Shares have been
duly issued to such Optionee. No Shares will be delivered upon the exercise of
an Option until the Option price has been paid in full in cash or by check. The
obligations of the Company to sell and deliver Shares upon exercise of Options
will be subject to all applicable laws, rules, and regulations, including all
applicable federal and state securities laws, and the obtaining of all such
approvals by government agencies as may be deemed necessary or appropriate by
the Board or the relevant committee of the Board. If so required by the Board,
no Shares will be delivered upon the exercise of an Option until the Optionee
has given the Company a satisfactory written statement that he is purchasing the
Shares for investment, and not with a view to the sale or distribution of any
such Shares, and with respect to such other matters as the Board may deem
advisable in order to assure compliance with applicable securities laws. All
Shares issued upon exercise of Options will bear appropriate restrictive
legends. The Company may require of any person to whom Options are granted that
he or she agree that, if the Company will deem it necessary or desirable to make
any public offering of shares of Common Stock, then without the prior written
consent of the Company or the managing underwriter of any such offering, he or
she will not sell, make any short sale of, loan, grant any option for the
purchase of, pledge or otherwise encumber, or otherwise dispose of any Shares
issued or issuable pursuant to Options, during such period (not to exceed 210
days) commencing on the effective date of the registration statement relating to
such offering as the Company may request.
ARTICLE VII
CONTINUATION AS A DIRECTOR
Neither this Plan nor any Option granted hereunder will confer upon any
individual any right to continue as a member of the Board, or limit or otherwise
affect any rights of the Company.
ARTICLE VIII
ADMINISTRATION
This Plan will be governed by and interpreted and construed in accordance
with the internal laws of the State of Delaware (without reference to principles
of conflicts or choice of law). The captions of the articles of this Plan are
for reference only and will not affect the interpretation or construction of
<PAGE>
- 7 -
this Plan. The Board or an authorized committee of the Board may make such
rules and regulations and establish such procedures as it deems appropriate for
the administration of this Plan. In the event of a disagreement as to the
interpretation of this Plan or any amendment thereto or any rule, regulation, or
procedure thereunder or as to any right or obligation arising from or related to
this Plan, the decision of the Board or such committee of the Board will be
final and binding upon all persons, including the Company and its stockholders.
<PAGE>
- 8 -
ARTICLE IX
TERMINATION AND AMENDMENT OF PLAN
The Board may at any time terminate this Plan or make such modifications of
this Plan as it will deem advisable. No termination or amendment of this Plan
may adversely affect the rights of any Optionee, as such, without the consent of
such Optionee.
ARTICLE X
EFFECTIVE DATE
This Plan will become effective as of the effective date of the Company's
first effective registration statement to become effective pursuant to the
Securities Act of 1933, as amended.
<PAGE>
EXHIBIT 10.3
ROWECOM INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
1. Definitions. As used in this 1999 Employee Stock Purchase Plan of
-----------
RoweCom Inc., the following terms have the respective meanings ascribed to them
below:
(a) Base Compensation means annual or annualized base compensation,
---- ------------
exclusive of overtime, bonuses, contributions to employee benefit plans, and
other fringe benefits.
(b) Beneficiary means, with respect to any Participating Employee, the
-----------
person designated as beneficiary on such Participating Employee's Membership
Agreement or other form provided by the Company for such purpose, or if no such
beneficiary is named, the person to whom the Option is transferred by will or
under the applicable laws of descent and distribution.
(c) Board means the board of directors of the Company, except that if and
-----
for so long as the board of directors of the Company has delegated its authority
with respect to the Plan to the Committee pursuant to Section 4, then all
references in this Plan to the Board will be deemed to refer to the Committee
acting in such capacity.
(d) Code means the Internal Revenue Code of 1986, as amended.
----
(e) Company means RoweCom Inc., a Delaware corporation.
-------
(f) Committee means the Compensation Committee of the Board.
---------
(g) Effective Date means the effective date of the Company's first
--------------
registration statement to become effective pursuant to the Securities Act of
1933, as amended.
(h) Eligible Employee means a person who is eligible under the provisions
-------- --------
of Section 7 to receive an Option as of a particular Offering Commencement Date.
(i) Employer means, as to any particular Offering Period, the Company and
--------
any Related Corporation that is designated by the Board as a corporation whose
Eligible Employees are to receive Options as of that Period's Offering
Commencement Date, and any Related Corporation that
<PAGE>
-2-
has been designated by the Board as such a corporation as to a prior Offering
Period, unless and until the Board acts to revoke such designation.
(j) Market Value means, as of the Offering Commencement Date of the first
------ -----
Offering Period under this Plan, the initial public offering price at which
shares of Stock are offered to the public, as specified in the Company's
registration statement referred to above, and as of any other particular date,
(i) if the Stock is listed on a national securities exchange, the closing price
of the Stock on such exchange on such date, (ii) if the Stock is not listed on a
national securities exchange but is quoted through the National Association of
Securities Dealers, Inc. Automated Quotation ("NASDAQ") National Market System
or any successor thereto, the last sale price of the Stock so quoted on such
date, and (iii) if the Stock is not listed on a national securities exchange or
quoted through the NASDAQ National Market System or any successor thereto, but
is quoted through NASDAQ other than through the National Market System, or is
otherwise publicly traded, the average of the closing bid and asked prices of
the Stock so quoted or otherwise reported on such date.
(k) Membership Agreement means an agreement whereby a Participating
---------- ---------
Employee authorizes an Employer to withhold payroll deductions from his or her
Base Compensation.
(l) Offering Commencement Date means the first business day of an Offering
-------- ------------ ----
Period on which Options are granted to Eligible Employees.
(m) Offering Period means each of the periods described in Section 8 that
-------- ------
is designated or deemed designated by the Board as an "Offering Period."
(n) Offering Termination Date means the last business day of an Offering
-------- ----------- ----
Period, on which Options must, if ever, be exercised.
(o) Option means an option to purchase shares of Stock granted under the
------
Plan.
(p) Option Shares means shares of Stock purchasable under an Option.
------ ------
(q) Participating Employee means an Eligible Employee to whom an Option is
------------- --------
granted.
<PAGE>
-3-
(r) Plan means this 1999 Employee Stock Purchase Plan of the Company, as
----
amended from time to time.
(s) Related Corporation means any corporation that is or during the term of
------- -----------
the Plan becomes a parent corporation of the Company, as defined in Section
424(e) of the Code, or a subsidiary corporation of the Company, as defined in
Section 424(f) of the Code.
(t) Stock means the common stock, $0.01 par value per share, of the
-----
Company.
2. Purpose of the Plan. The Plan is intended to encourage ownership of
------- -- --- ----
Stock by employees of the Company and any Related Corporations and to provide an
additional incentive for the employees to promote the success of the business of
the Company and any Related Corporations. It is intended that the Plan qualify
as an "employee stock purchase plan" within the meaning of Section 423 of the
Code.
3. Term of the Plan. The Plan will become effective on the Effective
---- -- --- ----
Date. No Option may be granted under the Plan after the tenth anniversary of
the Effective Date.
4. Administration of the Plan. The Plan will be governed by and
-------------- -- --- ----
interpreted and construed in accordance with the internal laws of the State of
Delaware (without reference to principles of conflicts or choice of law). The
captions of sections of the Plan are for reference only and will not affect the
interpretation or construction of the Plan. The Plan will be administered by
the Board. The Board will determine which semi-annual periods will be Offering
Periods in accordance with Section 8, and which (if any) Related Corporations
will be Employers as to each Offering Period. The Board will have authority to
interpret the Plan, to prescribe, amend, and rescind rules and regulations
relating to the Plan, to determine the terms of Options granted under the Plan,
and to make all other determinations necessary or advisable for the
administration of the Plan. All determinations of the Board under the Plan will
be final and binding as to all persons having or claiming any interest in or
arising out of the Plan, including the Company, its stockholders, and any and
all Participating Employees. The Board may delegate all or any portion of its
authority with respect to the Plan to the Committee, and thereafter until such
delegation is revoked by the Board all powers under the Plan delegated to the
Committee will be exercised by the Committee.
<PAGE>
-4-
5. Termination and Amendment of Plan. The Board may terminate the Plan at
----------- --- --------- -- ----
any time, and may amend the Plan at any time and from time to time. Without
limiting the generality of the foregoing, the Board may amend the Plan from time
to time to increase or decrease the length of any future Offering Periods and to
make all required conforming changes to the Plan. No termination or amendment
of the Plan may adversely affect the rights of a Participating Employee with
respect to any Option held by the Participating Employee prior to such
termination or amendment.
6. Shares of Stock Subject to the Plan. No more than an aggregate of
------ -- ----- ------- -- --- ----
2,500,000 shares of Stock may be issued or delivered pursuant to the exercise of
Options granted under the Plan (subject to automatic proportionate adjustment in
the event of any other stock dividend, stock split, stock combination,
recapitalization, or other similar event affecting the Common Stock and
occurring after February 5, 1999, and to adjustments made in accordance with
Section 9.7). Shares to be delivered upon exercise of Options may be either
shares of Stock that are authorized but unissued or shares of Stock held by the
Company in its treasury. If an Option expires or terminates for any reason
without having been exercised in full, the unpurchased shares subject to the
Option will not count against the above limit and will become available for
other Options granted under the Plan.
7. Persons Eligible to Receive Options. Each employee of an Employer will
------- -------- -- ------- -------
be granted an Option on each Offering Commencement Date on which such employee
meets all of the following requirements:
(a) The employee is customarily employed by an Employer for more than
twenty hours per week and for more than five months per calendar year.
(b) The employee will not, after grant of the Option, own Stock possessing
five percent or more of the total combined voting power or value of all classes
of stock of the Company or of any Related Corporation. For purposes of this
paragraph (b), the rules of Section 424(d) of the Code will apply in determining
the Stock ownership of the employee, and Stock that the employee may purchase
under outstanding options will be treated as Stock owned by the employee.
(c) Upon grant of the Option, the employee's rights to purchase Stock under
all employee stock purchase plans (as defined in Section 423(b) of the Code) of
the Company and its Related Corporations will not accrue at a rate exceeding
$25,000 of Market Value of Stock (determined as of the grant date) for each
calendar year in which such Option is outstanding at
<PAGE>
-5-
any time. The accrual of rights to purchase Stock will be determined in
accordance with Section 423(b)(8) of the Code.
8. Offering Commencement Dates. Options will be granted on the first
-------- ------------ -----
business day of the period running from the Effective Date to June 30, 1999, and
of each semi-annual period running from July 1 to the next following December 31
or from January 1 to the next following June 30 that is designated by the Board
as an Offering Period. Following the initial Offering Period under the Plan
(i.e., the period running from the Effective Date to June 30, 1999), all
succeeding semi-annual periods described above will be deemed Offering Periods
without need of further Board action unless and until contrary action will have
been taken by the Board prior to the beginning of what would otherwise be an
Offering Period.
9. Terms and Conditions of Options.
----- --- ---------- -- -------
9.1 General. All Options granted on a particular Offering Commencement
-------
Date will comply with the terms and conditions set forth in Sections 9.2 through
9.11. Subject to Sections 7(c) and 9.9, each Option granted on a particular
Offering Commencement Date will entitle the Participating Employee to purchase
that number of shares of Stock equal to the result of $12,500 (or such lesser
amount as is selected by the Board, prior to the applicable Offering
Commencement Date, and applied uniformly during the Offering Period then
beginning) divided by the Market Value of one such share on the Offering
Commencement Date and then rounded down, if necessary, to the nearest whole
number.
9.2 Purchase Price. The purchase price of each Option Share will be 85%
-------- -----
of the lesser of (a) the Market Value of a share of Stock as of the Offering
Commencement Date or (b) the Market Value of a share of Stock as of the Offering
Termination Date.
9.3 Restrictions on Transfer.
------------ -- --------
(a) Options may not be transferred otherwise than by will or pursuant to
applicable laws of descent and distribution. During the lifetime of a
Participating Employee, such Participating Employee's Options may not be
exercised by anyone other than such Participating Employee.
(b) The Optionee will agree in the Membership Agreement to notify the
Company of any transfer of Option Shares within two years of the Offering
Commencement Date for such Option Shares. The Company will have the right to
place a legend on all stock certificates representing Option
<PAGE>
-6-
Shares instructing the transfer agent to notify the Company of any transfer of
such Option Shares. The Company will also have the right to place a legend on
all stock certificates representing Option Shares setting forth or referring to
the restriction on transferability of such Option Shares.
9.4 Expiration. Each Option will expire at the close of business on the
----------
Offering Termination Date or on such earlier date as may result from the
operation of Sections 9.5 or 9.6.
9.5 Termination of Employment of Optionee. If a Participating Employee
----------- -- ---------- -- --------
ceases for any reason (other than death) to be continuously employed by an
Employer, whether due to voluntary severance, involuntary severance, transfer,
or disaffiliation of a Related Corporation with the Company, his or her Option
will immediately expire, and the Participating Employee's accumulated payroll
deductions will be returned by the Company. For purposes of this Section 9.5, a
Participating Employee will be deemed to be employed throughout any leave of
absence for military service, illness, or other bona fide purpose that does not
exceed the longer of ninety days or the period during which the Participating
Employee's reemployment rights are guaranteed by statute (including without
limitation the Veterans Reemployment Rights Act or similar statute relating to
military service) or by contract. If the Participating Employee does not return
to active employment prior to the termination of such period, his or her
employment will be deemed to have ended on the ninety-first day of such leave of
absence (or such longer period guaranteed by statute or by contract as provided
above).
9.6 Death of Optionee. If a Participating Employee dies, his or her
-----------------
Beneficiary will be entitled to withdraw the Participating Employee's
accumulated payroll deductions, or to purchase shares on the Offering
Termination Date to the extent that the Participating Employee would be so
entitled had he or she continued to be employed by an Employer. The number of
shares purchasable will be limited by the amount of the Participating Employee's
accumulated payroll deductions as of the date of his or her death. Accumulated
payroll deductions will be applied by the Company toward the purchase of shares
only if, not later than the Offering Termination Date, the Participating
Employee's Beneficiary submits to the Employer a written request that the
deductions be so applied. Accumulated payroll deductions not withdrawn or
applied to the purchase of shares will be delivered by the Company to the
Beneficiary within a reasonable time after the Offering Termination Date.
<PAGE>
-7-
9.7 Capital Changes Affecting the Stock. In the event that, between the
------- ------- --------- --- -----
Offering Commencement Date and the Offering Termination Date with respect to an
Option, a stock dividend is paid or becomes payable in respect of the Stock, or
there occurs a split-up or contraction in the number of shares of Stock, the
number of shares of Stock for which the Option may thereafter be exercised and
the price to be paid for each such share will both be proportionately adjusted.
In the event that, after the Offering Commencement Date, there occurs a
reclassification or change of outstanding shares of Stock or a consolidation or
merger of the Company with or into another corporation or a sale or conveyance,
substantially as a whole, of the property of the Company, the Participating
Employee will be entitled on the Offering Termination Date to receive shares of
Stock or other securities equivalent in kind and value to the shares of Stock he
or she would have held if he or she had exercised the Option in full immediately
prior to such reclassification, change, consolidation, merger, sale, or
conveyance and had continued to hold such shares (together with all other shares
and securities thereafter issued in respect thereof) until the Offering
Termination Date. In the event that there is to occur a recapitalization
involving an increase in the par value of the Stock that would result in a par
value exceeding the exercise price under an outstanding Option, the Company may
notify the affected Participating Employee of such proposed recapitalization,
after which the Participating Employee will have the right to exercise his or
her Option prior to such recapitalization; if the Participating Employee fails
to exercise the Option prior to recapitalization, the exercise price under the
Option will be appropriately adjusted. In the event that, after the Offering
Commencement Date, there occurs a dissolution or liquidation of the Company,
except pursuant to a transaction to which Section 424(a) of the Code applies,
each Option will terminate, but the Participating Employee will have the right
to exercise his or her Option prior to such dissolution or liquidation.
9.8 Payroll Deductions. A Participating Employee may purchase shares
------- ----------
under his or her Option during any particular Offering Period by completing and
returning to the Company at least 15 days prior to the beginning of such
Offering Period a Membership Agreement indicating a percentage (which will be a
full integer between one and ten, inclusive) of his or her Base Compensation
that is to be withheld each pay period (not to exceed an aggregate of $12,500 in
any Offering Period). No Participating Employee will be permitted to change the
percentage of Base Compensation withheld during an Offering Period. However,
not more than once per Offering Period the Participating Employee may cancel his
or her Agreement, and withdraw all (but not less than all) of his or her
accumulated payroll deductions, by submitting a written request therefor to the
Company not
<PAGE>
-8-
later than the close of business on the Offering Termination Date.
The percentage of Base Compensation withheld may be changed from one Offering
Period to another.
9.9 Exercise of Options. On the Offering Termination Date the
-------- -- -------
Participating Employee may purchase the number of shares purchasable by his or
her accumulated payroll deductions, or if less, the maximum number of shares
subject to the Option as provided in Section 9.1, provided that:
(a) If the total number of shares that all Optionees elect to purchase,
together with any shares already purchased under the Plan, exceeds the total
number of shares that may be purchased under the Plan pursuant to Section 6, the
number of shares that each Optionee is permitted to purchase will be decreased
pro rata based on the Participating Employee's accumulated payroll deductions in
relation to all accumulated payroll deductions currently being withheld under
the Plan.
(b) If the number of shares purchasable includes a fraction, such number
will be adjusted to the next smaller whole number and the purchase price will be
adjusted accordingly.
Accumulated payroll deductions not withdrawn prior to the Offering Termination
Date will be automatically applied by the Company toward the purchase of Option
Shares, or to the extent in excess of the aggregate purchase price of the shares
then purchasable by the Participating Employee, refunded to the Participating
Employee, except that where such excess is less than the purchase price for a
single share of Stock on the Offering Termination Date, such excess will not be
refunded but instead will be carried over and applied to the purchase of shares
in the first following Offering Period (subject to the possibility of withdrawal
by the Participating Employee during such Offering Period in accordance with the
terms of the Plan).
9.10 Delivery of Stock. Except as provided below, within a reasonable
-------- -- -----
time after the Offering Termination Date, the Company will deliver or cause to
be delivered to the Participating Employee a certificate or certificates for the
number of shares purchased by the Participating Employee. A stock certificate
representing the number of Shares purchased will be issued in the participant's
name only, or if his or her Membership Agreement so specifies, in the name of
the employee and another person of legal age as joint tenants with rights of
survivorship. If any law or applicable regulation of the Securities and
Exchange Commission or other body having jurisdiction in the premises requires
that the Company or the
<PAGE>
-9-
Participating Employee take any action in connection with the shares being
purchased under the Option, delivery of the certificate or certificates for such
shares will be postponed until the necessary action will have been completed,
which action will be taken by the Company at its own expense, without
unreasonable delay. The Optionee will have no rights as a shareholder in respect
of shares for which he or she has not received a certificate.
9.11 Return of Accumulated Payroll Deductions. In the event that the
------ -- ----------- ------- ----------
Participating Employee or the Beneficiary is entitled to the return of
accumulated payroll deductions, whether by reason of voluntary withdrawal,
termination of employment, or death, or in the event that accumulated payroll
deductions exceed the price of shares purchased, such amount will be returned by
the Company to the Participating Employee or the Beneficiary, as the case may
be, not later than within a reasonable time following the Offering Termination
Date applicable to the Option Period in which such deductions were taken.
Accumulated payroll deductions held by the Company will not bear interest nor
will the Company be obligated to segregate the same from any of its other
assets.
<PAGE>
EXHIBIT 10.4
ROWECOM INC.
AMENDED AND RESTATED 1998 STOCK INCENTIVE PLAN
1. Purposes of the Plan.
The purposes of this Amended and Restated 1998 Stock Incentive Plan of
RoweCom Inc. (the "Company") are to promote the interests of the Company and its
stockholders by strengthening the Company's ability to attract, motivate, and
retain employees and consultants of exceptional ability and to provide a means
to encourage stock ownership and a proprietary interest in the Company to
selected employees and consultants of the Company upon whose judgment,
initiative, and efforts the financial success and growth of the business of the
Company largely depend.
2. Definitions.
(a) "Accelerate," "Accelerated," and "Acceleration," when used with respect
to an Option, mean that as of the relevant time of reference, such Option will
become fully exercisable with respect to the total number of shares of Common
Stock subject to such Option and may be exercised for all or any portion of such
shares.
(b) "Acquisition" means
(i) a merger or consolidation in which securities possessing
more than 50% of the total combined voting power of the Company's
outstanding securities are transferred to a person or persons
different from the persons who held those securities immediately prior
to such transaction, or
(ii) the sale, transfer, or other disposition of all or
substantially all of the Company's assets to one or more persons
(other than any wholly owned subsidiary of the Company) in a single
transaction or series of related transactions.
(c) "Beneficial Ownership" means beneficial ownership determined pursuant
to Securities and Exchange Commission Rule 13d-3 promulgated under the Exchange
Act.
(d) "Board" means the Board of Directors of the Company.
<PAGE>
-2-
(e) "Change of Control" means a change in ownership or control of the
Company effected through either of the following transactions:
(i) any person or group of persons (within the meaning of
Section 13(d)(3) of the Exchange Act), other than the Company or a
person that directly or indirectly controls, is controlled by, or is
under common control with the Company, directly or indirectly acquires
Beneficial Ownership of securities possessing more than 50% of the
total combined voting power of the Company's outstanding securities
pursuant to a tender or exchange offer made directly to the Company's
stockholders that the Board does not recommend such stockholders to
accept, or
(ii) over a period of 36 consecutive months or less, there is a
change in the composition of the Board such that a majority of the
Board members (rounded up to the next whole number, if a fraction)
ceases, by reason of one or more proxy contests for the election of
Board members, to be composed of individuals who either (A) have been
Board members continuously since the beginning of such period, or (B)
have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in
the preceding clause (A) who were still in office at the time such
election or nomination was approved by the Board.
(f) "Committee" means the Compensation Committee of the Board; provided,
that the Board by resolution duly adopted may at any time or from time to time
determine to assume any or all of the functions of the Committee under the Plan,
and during the period of effectiveness of any such resolution, references herein
to the "Committee" will mean the Board acting in such capacity.
(g) "Common Stock" means the authorized common stock of the Company.
(h) "Company" means RoweCom Inc., a Delaware corporation.
(i) "Eligible Employee" means any person who, at the time of the grant of
an Option or Restricted Stock Award, is an employee (including officers and
employee directors) or consultant of the Company or any Subsidiary.
<PAGE>
-3-
(j) "Exchange Act" means the Securities Exchange Act of 1934, as amended
and in effect from time to time.
(k) "Fair Market Value" means the value of a share of Common Stock as of
the relevant time of reference, as determined as follows. If the Common Stock
is then publicly traded, Fair Market Value will be (i) the last sale price of a
share of Common Stock on the principal national securities exchange on which the
Common Stock is traded, if the Common Stock is then traded on a national
securities exchange; or (ii) the last sale price of the Common Stock reported in
the NASDAQ National Market System, if the Common Stock is not then traded on a
national securities exchange; or (iii) the average of the closing bid and asked
prices for the Common Stock quoted by an established quotation service for over-
the-counter securities, if the Common Stock is not then traded on a national
securities exchange or reported in the NASDAQ National Market System. If the
Common Stock is not then publicly traded, Fair Market Value will be the fair
value of a share of the Common Stock as determined by the Board or the
Committee, taking into consideration such factors as it deems appropriate, which
may include recent sale and offer prices of Common Stock in arms'-length private
transactions.
(l) "Hostile Takeover" means a change in ownership of the Company effected
through a transaction in which:
(i) any person or group of persons (within the meaning of
Section 13(d)(3) of the Exchange Act), other than the Company or a
person that directly or indirectly controls, is controlled by, or is
under common control with the Company, directly or indirectly acquires
Beneficial Ownership of securities possessing more than 50% of the
total combined voting power of the Company's outstanding securities
pursuant to a tender or exchange offer made directly to the Company's
stockholders that the Board does not recommend such stockholders to
accept, and
(ii) more than 50% of the securities so acquired in such tender
or exchange offer are accepted from holders other than the officers
and directors of the Company who are subject to the short-swing profit
restrictions of Section 16 of the Exchange Act.
(m) "Participant" means any Eligible Employee selected to receive an Option
or Restricted Stock Award pursuant to Section 5.
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(n) "Restricted Stock Award" means a right to the grant or purchase, at a
price determined by the Committee, of Common Stock which is nontransferable and
subject to substantial risk of forfeiture until specific conditions of
continuing employment or performance are met.
(o) "Incentive Stock Option" means an Option intended to qualify as an
"incentive stock option" under Section 422 of the Internal Revenue Code and
regulations thereunder.
(p) "Option" means a right to acquire shares of Common Stock granted under
the Plan, which right may but need not qualify as an "incentive stock option"
under Section 422 of the Internal Revenue Code and regulations thereunder.
(q) "Plan" means this Amended and Restated 1998 Stock Incentive Plan, as it
may be amended and/or restated from time to time.
(r) "Subsidiary" means any subsidiary corporation (as defined in Section
424 of the Internal Revenue Code) of the Company.
(s) "Takeover Price" means, with respect to any Incentive Stock Option, the
Fair Market Value per share of Common Stock on the date such Option is
surrendered to the Company in connection with a Hostile Takeover, or in the case
of any other Option, such Fair Market Value or, if greater, the highest reported
price per share of Common Stock paid by the tender or exchange offeror in
effecting such Hostile Takeover.
3. Shares of Common Stock Subject to the Plan.
(a) Subject to adjustment in accordance with the provisions of Section 3(c)
and Section 8 of the Plan, the aggregate number of shares of Common Stock that
may be issued or transferred pursuant to Options or Restricted Stock Awards
under the Plan will not exceed 2,500,000 shares, which aggregate number of
shares, automatically and without further action, will increase, effective as of
January 1, 2000, and each January 1 thereafter during the term of the Plan, by
an additional number of shares of Common Stock equal to five per cent (5%) of
the total number of shares of Common Stock issued and outstanding as of the
close of business on the immediately preceding December 31.
(b) The shares of Common Stock to be delivered under the Plan will be made
available, at the discretion of the Committee, from authorized but
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unissued shares of Common Stock and/or from previously issued shares of Common
Stock reacquired by the Company.
(c) If shares covered by any Option cease to be issuable for any reason,
and/or shares covered by Restricted Stock Awards are forfeited, such number of
shares will no longer be charged against the limitation provided in Section 3(a)
and may again be made subject to Options or Restricted Stock Awards.
4. Administration of the Plan.
(a) The Plan will be governed by and interpreted and construed in
accordance with the internal laws of the State of Delaware (without reference to
principles of conflicts or choice of law). The captions of sections of the Plan
are for reference only and will not affect the interpretation or construction of
the Plan.
(b) The Plan will be administered by the Committee. The Committee has and
may exercise such powers and authority of the Board as may be necessary or
appropriate for the Committee to carry out its functions as described in the
Plan. The Committee will determine the Eligible Employees to whom, and the time
or times at which, Options or Restricted Stock Awards may be granted and the
number of shares subject to each Option or Restricted Stock Award. The
Committee also has authority (i) to interpret the Plan, (ii) to determine the
terms and provisions of the Option or Restricted Stock Award instruments, and
(iii) to make all other determinations necessary or advisable for Plan
administration. The Committee has authority to prescribe, amend, and rescind
rules and regulations relating to the Plan. All interpretations,
determinations, and actions by the Committee will be final, conclusive, and
binding upon all parties.
(c) No member of the Committee will be liable for any action taken or
determination made in good faith by the Committee with respect to the Plan or
any Option or Restricted Stock Award under it.
5. Grants.
(a) The Committee will determine and designate from time to time those
Eligible Employees who are to be granted Options or Restricted Stock Awards, the
type of each Option to be granted and the number of shares covered thereby or
issuable upon exercise thereof, and the number of shares covered by each
Restricted Stock Award. Each Option and Restricted Stock Award will be
evidenced by a written agreement or instrument and may
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include any other terms and conditions consistent with the Plan, as the
Committee may determine.
(b) Subject to adjustment in accordance with the provisions of Section 8 of
the Plan, (i) no person may in any year be granted Options or Restricted Stock
Awards with respect to more than 1,100,000 shares of Common Stock, and (ii) no
more than an aggregate of 12,500,000 shares of Common Stock may be issued
pursuant to the exercise of Incentive Stock Options granted under the Plan.
6. Terms and Conditions of Stock Options.
(a) The price at which Common Stock may be purchased by a Participant under
an Option will be determined by the Committee; provided, however, that the
purchase price under a nonqualified Option will not be less than 85% of the Fair
Market Value of the Common Stock on the date of grant of such Option, and the
purchase price under an Incentive Stock Option will not be less than 100% of the
Fair Market Value of the Common Stock on the date of grant of such Option (or
110% of such Fair Market Value, in the case of any Incentive Stock Option
granted to a 10% owner (within the meaning of Section 422(b)(6) of the Code)).
(b) Each Option will be exercisable at such time or time, during such
periods, and for such numbers of shares as is determined by the Committee and
set forth in the agreement or instrument evidencing the Option grant (subject to
Acceleration by the Committee, in its discretion). In any event, the Option
will expire no later than the tenth anniversary of the date of grant (or the
fifth anniversary of the date of grant, in the case of any Incentive Stock
Option granted to a 10% owner (within the meaning of Section 422(b)(6) of the
Code)).
(c) Unless the Compensation Committee otherwise determines (whether at the
time the Option is granted or otherwise), upon the exercise of an Option, the
purchase price will be payable in full in cash.
(d) Incentive Stock Options may be granted under the Plan only to employees
of the Company or a Subsidiary, and the aggregate Fair Market Value (determined
as of the date the Incentive Stock Option is granted) of the number of shares
with respect to which Incentive Stock Options are exercisable for the first time
by a Participant in any calendar year may not exceed any applicable limit from
time to time imposed on Incentive Stock Options by the Internal Revenue Code
(such limit currently being $100,000). To the extent that an Incentive Stock
Option, whether at the
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time of grant or thereafter, exceeds such limits, the excess shares will be
considered to have been granted under a separate Option not constituting an
Incentive Stock Option.
(e) No fractional shares need be issued pursuant to the exercise of an
Option, nor need any cash payment be made in lieu of fractional shares.
(f) Subject to the short-swing profit restrictions of the Federal
securities laws, upon the occurrence of a Hostile Takeover, each Option granted
to any officer of the Company, if outstanding for at least six months, will
automatically be canceled in exchange for a cash distribution from the Company
in an amount equal to the excess of (i) the aggregate Takeover Price of the
shares of Common Stock at the time subject to the canceled Option (regardless of
whether the Option is otherwise then exercisable for such shares) over (ii) the
aggregate Option price payable for such shares. Such cash distribution will be
made within five days after the consummation of the Hostile Takeover. Neither
the approval of the Committee nor the consent of the Board will be required in
connection with such Option cancellation and cash distribution.
7. Terms and Conditions of Restricted Stock Awards.
(a) All shares of Common Stock subject to Restricted Stock Awards granted
or sold pursuant to the Plan may be issued or transferred for such consideration
(which may consist wholly of services), and subject to such restrictions, as the
Committee may determine, and will be subject to the following conditions:
(i) The shares may not be sold, transferred, or otherwise
alienated or hypothecated until the restrictions are removed or
expire, unless the Committee determines otherwise.
(ii) The Committee may provide in the agreement or instrument
evidencing the grant of the Restricted Stock Awards that the
certificates representing shares subject to Restricted Stock Awards
granted or sold pursuant to the Plan will be held in escrow by the
Company until the restrictions on the shares lapse in accordance with
the provisions of subsection (b) of this Section 7.
(iii) Each certificate representing shares subject to Restricted
Stock Awards granted or sold pursuant to the Plan will bear a legend
making appropriate reference to the restrictions imposed.
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(iv) The Committee may impose other conditions on any shares
subject to Restricted Stock Awards granted or sold pursuant to the
Plan as it may deem advisable, including without limitation
restrictions under the Securities Act of 1933, as amended, under the
requirements of any stock exchange or securities quotations system
upon which such shares or shares of the same class are then listed,
and/or under any blue sky or other securities laws applicable to such
shares.
(b) The restrictions imposed under subparagraph (a) above upon Restricted
Stock Awards will lapse at such time or times, and/or upon the achievement of
such predetermined performance objectives, as may be determined by the
Committee. In the event a holder of a Restricted Stock Award ceases to be an
employee or consultant of the Company, all shares under the Restricted Stock
Award that remain subject to restrictions at the time his or her employment or
consulting relationship terminates will be returned to or repurchased by the
Company unless the Committee determines otherwise.
(c) Subject to the provisions of subparagraphs (a) and (b) above, and
except as otherwise determined by the Committee, the holder will have all rights
of a shareholder with respect to the shares covered by Restricted Stock Awards
granted or sold, including the right to vote such shares and to receive all
dividends and other distributions paid or made with respect thereto.
8. Adjustment Provisions.
(a) All of the share numbers set forth in the Plan reflect the capital
structure of the Company as of February 5, 1999. Subject to Section 8(b), if
subsequent to such date the outstanding shares of Common Stock of the Company
are increased, decreased (including, without limitation, in connection with the
0.34905-for-one reverse stock split to be effected in or about March 1999), or
exchanged for a different number or kind of shares or other securities, or if
additional shares or new or different shares or other securities are distributed
with respect to such shares of Common Stock or other securities, through merger,
consolidation, sale of all or substantially all the property of the Company,
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split, or other distribution with respect to such shares of Common
Stock, or other securities and occurring after February 5, 1995, an appropriate
and proportionate adjustment will be made in (i) the maximum numbers and kinds
of shares provided in Sections 3 and 5, (ii) the numbers and kinds of
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shares or other securities subject to the then outstanding Options and
Restricted Stock Awards, and (iii) the price for each share or other unit of any
other securities subject to then outstanding Options (without change in the
aggregate purchase price as to which such Options remain exercisable).
(b) The Committee will have discretion to provide for the Acceleration of
one or more outstanding Options held by employees and the vesting of unvested
shares held by employees as Restricted Stock Awards upon the occurrence of a
Change of Control of the Company. Such Accelerated vesting may be conditioned
on the subsequent termination of the affected optionee's employment and/or such
other conditions as the Committee may determine. Except as determined by the
Committee prior to the occurrence of a Change of Control, any Options
Accelerated in connection with a Change of Control will remain fully exercisable
until the expiration or sooner termination of their respective terms.
(c) In the event of an Acquisition (subject to any provisions of then
outstanding Restricted Stock Awards and Options, respectively, granting greater
rights to the holders thereof): The unvested shares of Common Stock held by
employees as Restricted Stock Awards shall immediately vest in full, except to
the extent that the Company's repurchase rights with respect to those shares are
to be assigned to the acquiring entity; and all outstanding Options held by
employees will Accelerate to the extent not assumed by the acquiring entity or
replaced by comparable options to purchase shares of the capital stock of the
successor or acquiring entity or parent thereof (the determination of
comparability to be made by the Committee, which determination shall be final,
binding, and conclusive). The Committee shall have discretion, exercisable
either in advance of an Acquisition or at the time thereof, to provide (upon
such terms as it may deem appropriate) for (i) the automatic Acceleration of one
or more outstanding Options held by employees that are assumed or replaced and
do not otherwise Accelerate by reason of the Acquisition, and/or (ii) the
subsequent termination of one or more of the Company's repurchase rights with
respect to shares held by employees as Restricted Stock Awards that are assigned
in connection with the Acquisition and do not otherwise terminate at that time,
in the event that the employment of the respective grantees of such Options or
Restricted Stock Awards should subsequently terminate following such
Acquisition.
(d) Each outstanding Option that is assumed in connection with an
Acquisition, or is otherwise to continue in effect subsequent to such
Acquisition, will be appropriately adjusted, immediately after such Acquisition,
to apply to the number and class of securities that would have
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been issued to the Option holder, in consummation of such Acquisition, had such
holder exercised such Option immediately prior to such Acquisition. Appropriate
adjustments will also be made to the Option price payable per share, provided,
that the aggregate Option price payable for such securities will remain the
same. The class and number of securities available for issuance under the Plan
following the consummation of such Acquisition will be appropriately adjusted.
(e) Adjustments under this Section 8 will be made by the Committee in
accordance with the terms of this Section 8, and such determination of the
Committee as to what (if any) adjustments will be made and the extent thereof so
as to effectuate the intent of this Section 8 will be final, binding, and
conclusive. No fractional shares need be issued on account of any such
adjustments.
9. General Provisions.
(a) Nothing in the Plan or in any instrument executed pursuant to the Plan
will confer upon any Participant any right to continue in the employ of or as a
consultant to the Company or any of its Subsidiaries or affect the right of the
Company or any Subsidiary to terminate the employment or consulting relationship
of any Participant at any time, with or without cause.
(b) No shares of Common Stock will be issued or transferred pursuant to an
Option or Restricted Stock Award unless and until all then applicable
requirements imposed by Federal and state securities and other laws, rules and
regulations and by any regulatory agencies having jurisdiction, and by any stock
exchanges or securities quotations systems upon which the Common Stock may be
listed, have been fully met. As a condition precedent to the issuance of shares
pursuant to the grant or exercise of an Option or Restricted Stock Award, the
Company may require the Participant to take any reasonable action to meet such
requirements.
(c) No Participant and no beneficiary or other person claiming under or
through such Participant will have any right, title, or interest in or to any
shares of Common Stock allocated or reserved under the Plan or subject to any
Option, except as to such shares of Common Stock, if any, that have been issued
or transferred to such Participant.
(d) The Committee may adopt rules regarding the withholding of federal,
state, or local taxes of any kind required by law to be withheld with respect to
payments and delivery of shares to Participants under the Plan.
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With respect to any Option not intended to qualify as an Incentive Stock Option,
the Committee, in its discretion, may permit the Participant to satisfy, in
whole or in part, any tax withholding obligation that may arise in connection
with the exercise of the nonqualified stock option by electing to have the
Company withhold shares of Common Stock having a Fair Market Value equal to the
amount of the tax withholding.
(e) With the consent of the Committee, Options and Restricted Stock Awards
granted under the Plan may be transferred by a Participant to family members
and/or trusts for their benefit for bona fide estate-planning purposes. Except
for the foregoing, no Option and no right under the Plan, contingent or
otherwise, will be transferable or assignable or subject to any encumbrance,
pledge, or charge of any nature, except that a beneficiary may be designated
with respect to an Option in the event of death of a Participant, and if such
beneficiary is the executor or administrator of the estate of the Participant,
any rights with respect to such Option may be transferred to the person or
persons or entity (including a trust) entitled thereto under the will of the
holder of such Option.
(f) The Committee, with the consent of the relevant Participant, may cancel
all or a portion of any Option granted under the Plan and grant to the
Participant of a new Option for the same or a different number of shares as the
Option surrendered, or may require such voluntary surrender as a condition to a
grant of a new Option to such Participant. Subject to the provisions of Section
6(d), such new Option will be exercisable at such time or time, during such
periods, and for such numbers of shares, and in accordance with any other terms
or conditions, as are specified by the Committee at the time the new Option is
granted, without regard to the price, period of exercise, or any other terms or
conditions of the Option surrendered.
(g) The written agreements or instruments evidencing Restricted Stock
Awards or Options granted under the Plan may contain such other provisions as
the Committee may deem advisable. Without limiting the foregoing, and if so
authorized by the Committee, the Company may, with the consent of the
Participant and at any time or from time to time, cancel all or a portion of any
Option granted under the Plan then subject to exercise and discharge its
obligation with respect to the Option either by payment to the Participant of an
amount of cash equal to the excess, if any, of the Fair Market Value, at such
time, of the shares subject to the portion of the Option so canceled over the
aggregate purchase price specified in the Option covering such shares, or by
issuance or transfer to the Participant of shares of Common Stock with a Fair
Market Value at such time, equal to
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any such excess, or by a combination of cash and shares. Upon any such payment
of cash or issuance of shares, (i) there will be charged against the aggregate
limitations set forth in Section 3(a) a number of shares equal to the number of
shares so issued plus the number of shares purchasable with the amount of any
cash paid to the Participant on the basis of the Fair Market Value as of the
date of payment, and (ii) the number of shares subject to the portion of the
Option so canceled, less the number of shares so charged against such
limitations, will thereafter be available for other grants.
10. Amendment and Termination.
(a) The Board will have the power, in its discretion, to amend, modify,
suspend, or terminate the Plan at any time, subject to the rights of holders of
outstanding Options and Restricted Stock Awards on the date of such action.
(b) The Committee may make such modifications in the terms and conditions
of an Option or Restricted Stock Award held by a Participant as it deems
advisable; provided, that no such modification that adversely affects such
Participant's rights will be made without such Participant's consent.
(c) No amendment, suspension or termination of the Plan will, without the
consent of the Participant, terminate, impair, or adversely affect any right or
obligation under any Option or Restricted Stock Award previously granted to such
Participant under the Plan.
11. Effective Date of Plan and Duration of Plan.
The Plan first became effective upon its adoption by the Board and the
Company's stockholders as of May 4, 1998. Unless previously terminated, the
Plan will terminate on May 4, 2008.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Amendment No. 2 to Form S-1 (File No. 333-68761) of
our report dated January 15, 1999 (except for the information presented in
Notes 12 and 15 for which the date is February 8, 1999) relating to the
consolidated financial statements of RoweCom Inc., which appears in such
Prospectus. We also consent to the use of our report dated January 15, 1999 on
the Financial Statement Schedule for the three years ended December 31, 1998
listed under Item 16(a) of this Registration Statement when such schedule is
read in conjunction with the financial statements referred to in our report. We
also consent to the references to our firm under the captions "Experts" and
"Selected Financial Data" in such Prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Financial Data."
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 3, 1999
