<PAGE>
As filed with the Securities and Exchange Commission on November 5, 1999
Registration No. 333-85139
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 2 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MotherNature.com, Inc.
(Exact name of registrant as specified in its charter)
---------------
Delaware 5499 23-2832064
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Classification Code Number) Identification Number)
of incorporation or
organization)
---------------
MotherNature.com, Inc.
One Concord Farms
490 Virginia Road
Concord, Massachusetts 01742
(978) 929-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Michael I. Barach, President and Chief Executive Officer
MotherNature.com, Inc.
One Concord Farms
490 Virginia Road
Concord, Massachusetts 01742
(978) 929-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Howard S. Rosenblum, Esq. David T. Brewster, Esq.
Testa, Hurwitz & Thibeault, LLP Skadden, Arps, Slate, Meagher & Flom
125 High Street LLP
Boston, Massachusetts 02110 One Beacon Street
(617) 248-7000 Boston, Massachusetts 02108
(617) 573-4800
---------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Securities and Exchange 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 it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
SUBJECT TO COMPLETION, DATED NOVEMBER 5, 1999
4,100,000 Shares
[MOTHERNATURE.COM, INC. LOGO]
MotherNature.com, Inc.
Common Stock
-----------
This is an initial public offering of 4,100,000 shares of common stock of
MotherNature.com, Inc. MotherNature.com is selling all of the shares of common
stock offered under this prospectus. We anticipate that the initial public
offering price will be between $11.00 and $13.00 per share.
There is currently no public market for the shares. We have applied to have our
common stock approved for listing on the Nasdaq National Market under the
symbol "MTHR."
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 5 to read about risks you should consider carefully
before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public offering price............................................... $ $
Underwriting discounts and commissions.............................. $ $
Proceeds, before expenses, to us.................................... $ $
</TABLE>
-----------
We have granted the underwriters a 30-day option to purchase up to an
additional 615,000 shares of common stock from us at the initial public
offering price less the underwriting discount. The underwriters expect to
deliver the shares on , 1999.
-----------
Bear, Stearns & Co. Inc.
Hambrecht & Quist
Wit Capital Corporation
The date of this prospectus is , 1999
<PAGE>
Inside Front Cover:
[Photograph of a family in front of a computer with the MotherNature.com home
page on the screen.]
[Photograph of several MotherNature.com products, including shampoo, St. John's
Wort, Creatine, Energy/Sports Formula and dog food.]
The following text appears on the inside front cover: "an online retailer of
vitamins, supplements, minerals and other natural and healthy living products."
Inside front cover gatefold:
Left page:
[Photograph of woman swimming.]
[Photograph of MotherNature.com Web site home page.]
[Photograph of MotherNature.com Web site page relating to Maca.]
[Photograph of healthy couple.]
The following text appears on the left page of the gatefold: "a focus on
customer solutions--MotherNature.com combines informative content on nutrition
and health with a vast selection of vitamins, supplements, minerals and other
natural and healthy living products. Our user-friendly site enables customers
to shop four ways: by department, by gender/age, by ailment and by brand."
"The source of all things natural--we currently offer over 13,000 products--and
have the capacity to offer many more. In the herb category, for example,
popular items include echinacea, ginkgo biloba, ginseng, and St. John's Wort.
Our full range of vitamin products includes folic acid, vitamins A through E,
and bioflavonoids. We offer a complete assortment of mineral products, such as
calcium, chromium, potassium, and zinc. And we carry many popular brands,
including Natrol, Twinlab and Naturemade."
Right page:
[Photograph of woman stretching.]
[Photograph of MotherNature.com Web site page of health-related articles.]
[Photograph of collection of Rodale books.]
[Photograph of woman unpacking box of MotherNature.com products.]
[Photograph of several MotherNature.com products, including teas, coffee,
Gluco-Support Formula and Executive Stress Formula.]
The following text appears on the right page of the gatefold: "an active
community of health-conscious consumers--MotherNature.com is a content provider
for consumers interested in healthy living solutions. We've established an
active online community dedicated to educating consumers about healthy living
and natural products and communicate with this community through e-mail alerts,
late breaking news postings and a bi-weekly newsletter. Thanks to our recent
alliance with Rodale Inc., we also have the right to offer the contents of over
150 healthy living books and certain columns from Prevention magazine."
"a memorable consumer brand--MotherNature.com offers 375 private label products
in a variety of categories, including coffee, lip balm, vitamins, minerals,
herbs, supplements, soaps, pillows and comforters."
<PAGE>
PROSPECTUS SUMMARY
This summary highlights certain information found in greater detail elsewhere
in this prospectus. In addition to this summary, we urge you to read the entire
prospectus carefully, especially the risks of investing in our common stock
discussed under "Risk Factors," before you decide to buy our common stock.
MotherNature.com, Inc.
Our Business
We are an online retail store and information source for natural and healthy
living products. We offer approximately 13,000 vitamins, supplements, minerals
and other natural and healthy living products on our site. We also provide
educational and authoritative information on these products from recognized
sources in an easily accessible manner that allows our customers to make
informed product selections. Through our innovative combination of content and
commerce and an aggressive mass media advertising program, we intend to
establish MotherNature.com as the destination of choice and trusted advisor for
consumers interested in vitamins, supplements, minerals and other natural and
healthy living products.
Since we launched our redesigned Web site in late 1998, our revenues have
grown from $105,000 in the fourth quarter of 1998, to $251,000 in the first
quarter of 1999, to $704,000 in the second quarter of 1999 to $1.6 million in
the third quarter of 1999. In addition, revenues in October 1999 were
approximately $818,000. As of September 30, 1999, we had approximately 136,000
registered members, or persons who have provided us with contact information,
in the MotherNature.com community.
The key components of our site include the following:
Educational and Authoritative Information. Through our Healthy Living
Library, we provide consumers with access to over 3,000 articles, news clips,
excerpts from Rodale books and encyclopedia entries from the Encyclopedia of
Natural Health, as well as narratives from prominent sources and journals, on a
variety of natural and healthy living topics, such as health concerns, natural
remedies and recent studies. The Encyclopedia of Natural Health is licensed
from Healthnotes, Inc. and incorporates information gathered from over 500
authoritative scientific and medical journals. Through our recent alliance with
Rodale Inc., we have the right to offer the contents of over 150 healthy living
books and certain columns from Prevention magazine. We also have established a
Medical Advisory Board whose members contribute content and guide our editorial
staff in developing and reviewing content.
Integration of Content and Commerce. We integrate our content with our
products in a manner that allows our customers to make informed product
selections. Consumers can search our site for specific products and easily
access relevant information on those products, or they can research specific
health concerns, lifestyles or special interests and find complementary
products or our product recommendations, called "solution baskets," to address
particular health concerns.
Convenient and Private Shopping. Consumers can browse or shop on our site 24
hours a day, seven days a week in the privacy of their homes or offices. At
MotherNature.com, consumers can research and purchase products for personal
health concerns without facing retail store personnel. Consumers also can use
our personal shopper service or reorder previous selections with one click.
Broad, Expandable Product Assortment. Our product selection is substantially
larger than that offered by store-based retailers. We offer approximately
13,000 vitamins, supplements, minerals and other natural and healthy living
products on our site, and we can special order additional products through our
supplier relationships. Our online store is easily expandable to include
additional natural and healthy living products and related services.
1
<PAGE>
Customer Information and Ongoing Communication. We use e-mail to provide
order status and shipping confirmation and to keep our members aware of
selected healthy living news relating to their past purchases. Because we
obtain demographic information on our members through the registration process,
we are able to refine our site and customize our product offerings.
Our Market Opportunity
The vitamins, supplements and minerals market is projected to grow as the
"baby boomer" population becomes increasingly concerned with aging and disease,
preventative health care and natural products. Sales of vitamins, supplements
and minerals totaled approximately $8.9 billion in 1998 and are forecasted to
grow at a compound annual rate of 13.3% to $16.6 billion in 2003, according to
Packaged Facts, a consumer products market research firm. As research studies
have indicated the health benefits of vitamins, supplements and minerals, the
percentage of U.S. adults who take vitamins has increased from 43% in 1993 to
56% in 1998, according to Packaged Facts. We believe there is also a large
market opportunity for us in other natural product categories beyond vitamins,
supplements and minerals, including personal care products, household products,
non-perishable foods, organic coffees and teas, sports nutrition, cosmetics,
baby care products and pet care products. For additional information, see
"Business--Industry Background."
Our Strategy
The key elements of our growth strategy are as follows:
. promote the memorable MotherNature.com brand name through an aggressive
advertising campaign, including a national television campaign that
commenced in late August 1999;
. establish MotherNature.com as the trusted authority for vitamins,
supplements, minerals and other natural and healthy living products
through our marketing efforts and our informative and authoritative
content;
. capitalize on the inherent need to replenish vitamins, supplements and
minerals by promoting repeat and complementary product purchases;
. enlist and provide financial incentives for other businesses in the
healthy living industry, such as health care providers and health clubs,
to refer their customers to our site;
. provide quality customer service and rapid product delivery through our
in-house order fulfillment facility, which we are expanding in order to
increase inventory levels of popular products; and
. expand our international presence in order to establish MotherNature.com
as a global brand.
Our Alliance with Rodale
We recently entered into a strategic content and cross-marketing alliance
with Rodale, a leading publisher of health related, active living magazines and
books. Through this relationship, we have the right to include online versions
of more than 150 Rodale books on vitamins, supplements and minerals, natural
healing, alternative medicine, home health and cooking, as part of an
expandable, fully searchable online library and database of health information.
The alliance with Rodale will also allow us to direct market to Rodale's
customer base of more than 25 million customers and to include advertisements
and promotional materials in Rodale's Prevention magazine and book shipments.
Our Offices
Our executive offices are located at One Concord Farms, 490 Virginia Road,
Concord, Massachusetts 01742, and our telephone number is (978) 929-2000. Our
Web site address is www.MotherNature.com. The information on our Web site is
not incorporated by reference into this prospectus and should not be considered
as part of this prospectus.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered.......................... 4,100,000 shares
Common stock outstanding after this offering.. 15,074,370 shares
Use of proceeds............................... We intend to use the net
proceeds of this offering for
advertising and marketing
expenditures, to fund operating
losses and for general
corporate purposes, including
expanding our product and
service offerings, enhancing
our infrastructure, Web site
development and working
capital. We may also use a
portion of the proceeds to
expand our business through
strategic alliances and
acquisitions.
Proposed Nasdaq National Market symbol........ MTHR
</TABLE>
- --------
The number of shares of common stock outstanding after this offering is based
on shares of our common stock outstanding as of September 30, 1999. This
calculation:
. includes 9,055,392 shares of common stock to be issued upon the
conversion of all of our convertible preferred stock outstanding as of
September 30, 1999;
. excludes 1,367,008 shares of common stock issuable upon exercise of all
options outstanding under our 1998 Stock Plan as of September 30, 1999
with a weighted average exercise price of $8.93 per share (132,298 of
which were exercisable as of September 30, 1999); and
. excludes 159,938 shares of common stock issuable upon exercise of all of
our warrants outstanding as of September 30, 1999.
Conventions Which Apply to this Prospectus
Unless we indicate otherwise, all information in this prospectus reflects the
following:
. no exercise by the underwriters of their over-allotment option to
purchase up to 615,000 additional shares of common stock;
. the conversion of all of our convertible preferred stock outstanding as
of September 30, 1999 into 9,055,392 shares of our common stock upon the
closing of this offering; and
. a 1 for 7.463 reverse stock split to be effected immediately prior to
consummation of this offering.
References in this prospectus to "MotherNature.com," "we," "our" and "us"
refer to MotherNature.com, Inc., a Delaware corporation. References to the
"offering" refer to the initial public offering of our common stock being made
by this prospectus. We were incorporated in Pennsylvania in December 1995 and
we reincorporated in Delaware in June 1998. We have applied for federal
registration for, among others, the marks "MotherNature.com" combined with the
MotherNature.com logo, the MotherNature.com logo, "Go Ask Mother@" and "Your
Healthy Living Headquarters." "Natural products, healthy advice" is also one of
our trademarks. All other trademarks, trade names and service marks appearing
in this prospectus are the property of their respective owners.
3
<PAGE>
Summary Financial Data
The following tables set forth summary financial data for our company. You
should read this information together with the financial statements and the
notes to those statements appearing elsewhere in this prospectus and the
information under "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
-------------------------------- -------------------------
1996 1997 1998 1998 1999
-------- --------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales............... $ 21,489 $ 193,064 $ 476,549 $ 371,160 $ 2,589,048
Cost of sales........... 10,681 71,484 417,998 225,423 2,263,738
-------- --------- ----------- ----------- ------------
Gross profit............ 10,808 121,580 58,551 145,737 325,310
Operating expenses...... 91,489 272,862 6,733,716 3,772,858 34,378,628
-------- --------- ----------- ----------- ------------
Operating loss.......... (80,681) (151,282) (6,675,165) (3,627,121) (34,053,318)
Net loss................ $(80,681) $(159,532) $(6,610,684) $(3,592,083) $(33,393,582)
======== ========= =========== =========== ============
Basic and diluted net
loss per common share.. $ (0.19) $ (0.25) $ (9.83) $ (5.36) $ (39.43)
======== ========= =========== =========== ============
Pro forma basic and
diluted net loss per
common share(1)(2)..... $ (0.19) $ (0.25) $ (2.67) $ (1.87) $ (2.40)
======== ========= =========== =========== ============
Shares used to compute
basic and diluted net
loss per common
share(1)............... 430,474 650,607 672,289 669,972 846,953
Shares used to compute
pro forma basic and
diluted net loss per
common share(1)(2)..... 430,474 650,607 2,479,964 1,920,989 13,892,245
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
--------------------------
Pro Forma
Actual As Adjusted(3)
----------- --------------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................ $27,647,394 $72,653,394
Working capital...................................... 17,934,634 62,940,634
Total assets......................................... 49,834,599 94,840,599
Total long-term debt, net of current portion......... 12,300 12,300
Total convertible preferred stock.................... 647,450 --
Total shareholders' equity........................... 37,401,117 82,407,117
</TABLE>
- --------
(1) Please see the financial statements and the notes to those statements
appearing elsewhere in this prospectus for the determination of shares
used in computing basic and diluted net loss per common share and pro
forma basic and diluted net loss per common share.
(2) The pro forma data give effect to the conversion of all of our convertible
preferred stock outstanding as of September 30, 1999 into 9,055,392 shares
of our common stock upon the closing of this offering.
(3) The pro forma as adjusted data give effect to the conversion of all of our
convertible preferred stock outstanding as of September 30, 1999 into
9,055,392 shares of our common stock upon the closing of this offering and
reflect the sale of 4,100,000 shares of common stock by us in this
offering at an assumed initial public offering price of $12.00 per share,
after deducting underwriting discounts and commissions and estimated
offering expenses payable by us.
4
<PAGE>
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You should
carefully consider the following information about these risks, together with
the other information contained in this prospectus, before you decide whether
to buy our common stock. If any of the following risks actually occur, our
business, results of operations and financial condition would likely suffer. In
any such case, the market price of our common stock could decline, and you may
lose all or part of the money you paid to buy our common stock.
The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties, including those not presently known to us
or that we currently deem immaterial, may also result in decreased revenues,
increased expenses or other events which could result in a decline in the price
of our common stock.
Risks Related to Our Business
Our business is difficult to evaluate because we have a limited operating
history under our current business model.
Although we were organized in December 1995, our current management team
joined us after June 1998 and our current, redesigned Web site was launched in
late 1998. Accordingly, an investor in our common stock must consider the
challenges, risks and uncertainties frequently encountered by early-stage
companies using new and unproven business models in new and rapidly evolving
markets. These challenges include our ability to:
. execute on our business model;
. increase brand recognition;
. manage growth in our operations;
. expand our customer base cost-effectively;
. retain customers;
. manage inventory levels effectively;
. upgrade and enhance our Web site, transaction-processing systems, order
fulfillment capabilities and inventory management systems;
. access additional capital when required;
. develop and renew strategic relationships with companies in the
vitamins, supplements, minerals and natural products industry, such as
suppliers and content providers; and
. attract and retain key personnel.
We cannot be certain that our business model will be successful or that we will
successfully address these and other challenges, risks and uncertainties.
5
<PAGE>
Consumers of vitamins, supplements, minerals and other natural products may not
purchase products from our site, which would reduce our revenues and prevent us
from becoming profitable.
Due to our limited operating history, we have not proven an ability to
attract and retain a high volume of online customers. We may not be able to
convert a large number of customers from traditional shopping methods to online
shopping for vitamins, supplements, minerals and other natural products. Even
if we are successful at attracting online customers, we expect it will take
several years to build a critical mass of repeat customers. If we do not
attract and retain a high volume of online customers at a reasonable cost, we
will not be able to increase our revenues or achieve profitability. Specific
factors that could prevent widespread customer acceptance of our store include:
. lack of consumer awareness of our online store because of our relatively
short market presence under our current business model;
. customer concern about the privacy of personal health information;
. pricing that does not meet customer expectations as we expand our
product offerings and enhance our marketing efforts;
. incorrectly filled orders or damaged products resulting from our
transition to new order fulfillment systems; and
. delayed response to customer service requests if we fail to adequately
increase our customer service staff.
If our brand does not rapidly achieve broad recognition, we may lose the
opportunity to build a critical mass of customers necessary to achieve
increased sales and market share.
We believe that we must achieve increased sales and market share to become
profitable. Accordingly, we have spent and intend to continue to spend
significant amounts on an aggressive brand-enhancement strategy, which includes
advertising, promotional programs and public relations activities. Our brand
promotion efforts may not be successful or may not sufficiently increase our
revenues to cover our advertising and promotional expenses. In addition, even
if our brand recognition increases, the number of new users or transactions in
our online store may not increase.
We anticipate our history of losses will continue, which may decrease the value
of our stock.
We believe that we will continue to incur operating losses for the
foreseeable future and that the rate at which we will incur such losses will
increase significantly from current levels. As of September 30, 1999, we had an
accumulated deficit of approximately $40.2 million, and we have not achieved
profitability. We incurred net losses of approximately $33.4 million for the
nine months ended September 30, 1999 and approximately $6.6 million for the
fiscal year ended December 31, 1998. Specifically, we intend to substantially
increase our costs and operating expenses related to:
. intensifying our brand development efforts through advertising and other
marketing activities;
. expanding our product offerings and Web site content;
. providing promotional benefits to our customers, such as product
discounts and free shipping on large orders;
. upgrading our Web site, transaction-processing systems, order
fulfillment capabilities and inventory management systems;
6
<PAGE>
. expanding our distribution and warehousing facilities;
. developing and renewing strategic relationships with companies in the
vitamins, supplements, minerals and natural products industry, such as
content providers and vendors; and
. employing additional personnel as our business expands.
Because we will spend these amounts before we receive any incremental revenues
from these efforts, our losses will be greater than the losses we would incur
if we developed our business more slowly. In addition, we may find that these
efforts are more expensive than we currently anticipate, which would further
increase our losses.
Disappointing quarterly revenue or operating results could cause our stock
price to fall.
Our quarterly revenue and operating results have fluctuated significantly in
the past and may fluctuate significantly in the future due to a variety of
factors, including:
. fluctuations in the number of visitors to our Web site as a result of
the relative successes or failures of our advertising campaign and our
ability to convert visitors into customers;
. demand for our products;
. our use of advertising, discount pricing and promotions;
. amount and timing of our operating costs and capital expenditures, which
are currently difficult to predict;
. introductions by our competitors of new or enhanced Web sites, products
or services;
. fluctuations in shipping costs or delivery times based on changes in the
market for distribution services;
. management of our inventory levels and fulfillment operations as we
introduce new inventory and order fulfillment staff and systems;
. price competition and fluctuations in the wholesale prices of the
products we sell as market demand for our products and competition
increase;
. changes in the mix of products we sell in response to changes in
customer demand;
. shifts in research findings, media publicity and consumer perception
regarding vitamins, supplements and minerals;
. expenses related to potential strategic relationships or acquisitions of
content, technology or businesses;
. changes in or enforcement of government regulations affecting our
business;
. changes in our management team and key personnel; and
. continuing fluctuations in general economic conditions and economic
conditions specific to the Internet, electronic commerce and the
vitamins, supplements, minerals and natural products industries as use
and visibility of vitamins, supplements and minerals increase.
Our limited operating history makes it difficult to assess the impact of
these factors on our operating results.
7
<PAGE>
Extensive federal, state and local government regulations may restrict the way
we sell our products, resulting in restrictions on the products and content we
offer our customers and significant additional expenses.
The laws, regulations and enforcement policies governing our dietary
supplement products are relatively new and still evolving. In general, the
dietary supplement industry has adopted more aggressive interpretations of
these laws than have the relevant regulatory agencies. We cannot be certain
that our attempts, or those of our suppliers, to comply with laws and
regulations in this area are or will be deemed sufficient by the appropriate
regulatory agencies. Enforcement actions by any of these agencies can result in
civil and criminal penalties, an injunction to stop or modify certain selling
methods, seizure of our products, adverse publicity or voluntary recalls and
labeling changes. If the FDA, FTC or other federal or state governmental agency
were to undertake an enforcement action against us, it could cause an immediate
decrease in our revenues, cause us to incur significant additional expenses and
result in a decrease in our stock price. State professional licensing bodies
also may object to the provision of health-related information or advice on our
site.
The law relating to the sale of most of our products, especially over the
Internet, remains largely unsettled and we cannot predict what enforcement
positions the FDA or other governmental agencies may take with respect to our
selling methods. The FDA has indicated that claims or statements made on a
company's Web site about dietary supplements may constitute "labeling" and thus
be subject to regulation. For example, the FDA may determine that, under
certain circumstances, the integration of content describing the health
benefits of dietary supplements with the sale of those supplements violates
labeling restrictions applicable to such products. If the FDA makes that
determination, products that would otherwise be considered supplements could
then be deemed to be unapproved and, therefore, illegal drugs. In particular,
the FDA may limit the claims that can be made, or information that can be used,
discussing or implying the benefits of dietary supplements with respect to
certain health conditions. Under applicable law, "statements of nutritional
support" may be used in dietary supplement labeling provided the statements do
not state drug claims, i.e., a claim that the supplement will diagnose,
mitigate, treat, cure or prevent a disease. It is possible that the statements
presented with initial product descriptions on our site may be determined by
the FDA to be drug claims rather than acceptable statements of nutritional
support. In addition, some of our suppliers may incorporate objectionable
statements directly in their product names or on their products' labels, or
otherwise fail to comply with applicable manufacturing, labeling and
registration requirements for over-the-counter or homeopathic drugs or dietary
supplements. As a result, we may have to remove objectionable statements or
products from our site or modify these statements, or product names or labels,
in order to comply with FDA regulations. Such changes could interfere with our
marketing of products and could cause us to incur significant additional
expenses.
In addition, the FDA permits the dissemination of third-party literature in
connection with the sale of dietary supplements in establishments if, among
other things, there is physical separation between such literature and
supplements. It is not yet clear how this restriction may apply to online
retailers. Because of the evolving regulatory regime for supplements, we cannot
assure you that the way in which we present information about products on our
site would be determined to be lawful by the FDA. As a result, we may have to
remove objectionable literature from our site or modify our selling methods in
order to comply with any FDA enforcement actions, which could cause us to incur
significant additional expenses.
The FTC has the right to monitor and regulate our advertising and has pursued
numerous manufacturers and retailers of dietary supplements for deceptive
advertising or failure to substantiate promotional claims. Moreover, the FTC is
implementing a recent initiative to monitor and bring enforcement actions
against Web sites that may be disseminating false or unsubstantiated health
claims. In addition, our activities are regulated by various agencies of the
states--including state medical, pharmacy or dietician licensing bodies--
localities and foreign countries in which our customers reside. Our efforts to
comply with existing laws and regulations may be costly, may force us to change
our selling strategy and may not be successful. We cannot assure you that we
will be able to comply with any future laws, regulations, interpretations or
applications without incurring significant costs or adjusting our business
model. A more detailed discussion of the government regulations affecting our
business is included in this prospectus under the heading "Business--Regulatory
Environment."
8
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We may fail to compete effectively in our market, which could result in lower
revenues or loss of market share.
The electronic commerce industry is new, rapidly evolving and intensely
competitive, and we expect competition to intensify in the future. If we fail
to attract and retain a large customer base and our competitors establish a
market position more prominent than ours, we could experience declines in our
revenue and a loss of market share. Barriers to entry are minimal and current
and new competitors can launch sites at a relatively low cost. In addition, the
vitamins, supplements, minerals and natural and healthy living products market
is very competitive and highly fragmented, with no clear dominant leader and
increasing public and commercial attention. We compete with a variety of other
companies, including:
. traditional vitamins, supplements, minerals and natural and healthy
living products retailers, including General Nutrition Centers and
Vitamin Shoppe;
. the online retail initiatives of several traditional vitamins,
supplements, minerals and natural and healthy living products retailers,
including VitaminShoppe.com and Vitamins.com;
. online retailers of pharmaceutical and other health-related products
which also carry vitamins, supplements, minerals and natural and healthy
living products, including Drugstore.com, PlanetRx.com, More.com,
SelfCare and CVS.com;
. independent online retailers specializing in vitamins, supplements,
minerals and natural and healthy living, including HealthShop.com,
eNutrition, allherb.com, vitamins.net, HealthQuick and Vitanet;
. mail-order and catalog retailers of vitamins, supplements, minerals and
natural and healthy living products, including NBTY, Amrion, Rexall
Sundown and Vitamin Shoppe, some of which have already developed online
retail outlets; and
. direct sales organizations, retail drugstore chains, health and natural
food store merchants, mass market retail chains and various
manufacturers of natural products.
Many of our competitors have longer operating histories, larger customer or
user bases, greater brand recognition and significantly greater financial,
marketing and other resources than we have. In addition, larger, well
established and well financed entities may acquire, invest in or form joint
ventures with our online competitors as the use of the Internet and other
online services increases. Increased competition from these or other
competitors could result in reduced operating margins, loss of market share and
a diminished brand franchise.
If we are unable to adapt to rapid technological change, our customers may
cease buying our products or forego the use of our services and use those of
our competitors.
To remain competitive, we must continue to enhance and improve the
functionality and features of our online store. If our competitors introduce
new products and services embodying new technologies, or if new industry
standards and practices emerge, our existing Web site and proprietary
technology and systems may be rendered obsolete. Our future success will depend
on our ability to:
. enhance our existing services;
. internally develop and/or license from third parties new services and
technologies; and
. respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
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Moreover, we may use new technologies ineffectively or fail to adapt our Web
site, transaction-processing systems, order fulfillment infrastructure and
inventory management systems to customer requirements or emerging industry
standards.
If we are unable to protect our intellectual property adequately, we could lose
our competitive advantage in the vitamins, supplements and minerals market.
Our trademarks, service marks, copyrights, trade dress, which is the
appearance and packaging of our products, trade secrets and similar
intellectual property are critical to our success. The unauthorized
reproduction or other misappropriation of our trademarks or other intellectual
property could diminish the value of our proprietary rights or goodwill. We
rely upon a combination of trademark and copyright law, trade secret protection
and confidentiality or license agreements with our employees, affiliates and
others to protect our proprietary rights. We have submitted trademark and
service mark applications for our name combined with our logo, and these
applications are pending. Effective trademark, service mark, copyright and
trade secret protection may not be available, and the steps we have taken and
may take in the future to protect our proprietary rights may not be adequate.
For instance, we may not be able to register our name combined with our logo as
a federal trademark because there are other companies using the words "mother
nature" who may have prior rights in those words. In addition, we may not be
able to prevent other people from using the words "mother nature" in their
businesses. It is possible that others could use the words "mother nature" in
such a way as to damage the goodwill associated with our business or try to
prevent the use of our name or trademark. In addition, we license our
trademarks and other intellectual property to third parties, and we cannot be
certain that such licensees will not take actions that harm the value of our
proprietary rights.
If we are unable to prevent third parties from acquiring domain names that are
similar to, infringe upon or otherwise decrease the value of our domain names,
we could lose our competitive advantage in the vitamins, supplements and
minerals market.
We may be unable to prevent third parties from acquiring domain names that
are similar to, infringe upon or otherwise decrease the value of our domain
names, trademarks and other proprietary rights. We currently hold several Web
domain names relating to our brand, including "mothernature.com." The
acquisition and maintenance of domain names generally is regulated by
governmental agencies and their designees. The regulation of domain names in
the United States and abroad is expected to change in the near future.
Governing bodies may establish additional top-level domains, appoint additional
domain name registrars or modify the requirements for holding domain names. As
a result, we may be unable to acquire or maintain relevant domain names in all
countries in which we conduct business and other parties may use domain names
similar to ours. Furthermore, the relationship between regulations governing
domain names and laws protecting trademarks and similar proprietary rights is
unclear.
If we do not successfully expand our distribution operations, Web site and
related information systems to accommodate increases in customer demand, our
revenues may fall below expectations.
Our success depends on our ability to rapidly expand our distribution
operations and related information systems in order to accommodate an expected
increase in customer orders. If we do not successfully expand our distribution
operations to accommodate increases in customer demand, we may not be able to
increase our revenues in accordance with the anticipated expectations of
securities analysts and investors.
The planned expansion of our distribution operations may cause disruptions in
our business. Our historical distribution operations in Southhampton,
Pennsylvania were not adequate to accommodate significant increases in customer
demand. We recently moved all of our distribution operations to a facility in
Springfield, Massachusetts, from which we began distributing products in July
1999. Our ability to effectively process and ship customer orders from this new
facility is uncertain. If we do not effectively manage the transition to our
new distribution center, we could lose customers.
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Moreover, our future success will depend in part on our ability to rapidly
expand our Web site, transaction-processing systems, order fulfillment
infrastructure and inventory management systems without systems interruptions
in order to accommodate increased traffic and demand. We are currently
implementing new technical and operational systems, including a new order
processing, inventory management, shipping and billing software package to
accommodate anticipated increases in customer traffic and order demand. In
addition, we recently installed a new accounting and financial reporting system
and are currently in the process of integrating this system with our other
information systems. Any inability to scale our systems may cause unanticipated
system disruptions, slower response times, degradation in customer service
levels, impaired quality and speed of order fulfillment or delays in reporting
accurate financial information. We are not certain that we will be able to
project the rate or timing of increases, if any, in the use of our Web site
accurately or promptly enough to permit us to effectively upgrade and expand
our transaction-processing systems or to integrate smoothly any newly developed
or purchased modules with our existing systems.
Expanding the breadth and depth of our product and service offerings is
expensive and difficult, and these efforts may not be profitable or result in
increased sales.
We intend to expand the number of products we offer on our site by promoting
new or complementary products or services. We cannot be certain that we will be
able to expand our product and service offerings in a cost-effective or timely
manner. Furthermore, any new product or service offering that is not favorably
received by consumers could damage the reputation of our brand. The lack of
market acceptance of our efforts to expand offerings or our inability to
generate satisfactory revenues from such expanded offerings could result in
decreased revenues, price reductions, reduced margins and loss of market share.
In addition, expansion of our offerings could strain our management, financial
and operational resources. For example, we may need to incur significant
marketing expenses, develop relationships with new fulfillment partners or
manufacturers or comply with new regulations.
If we fail to properly manage the growth of our inventory levels, we may be
unable to keep pace with customer demand or to sell our excess inventory.
We plan to increase the number and range of products that we stock in
inventory in order to ensure that we can promptly deliver products to our
customers. Many of our products have a limited shelf life, and we may be unable
to sell inventory that we have stored for an extended period of time. In the
event that one or more of the products we stock do not achieve widespread
consumer acceptance, we may be required to take inventory markdowns. In
addition, the market for nutritional supplements is characterized by sudden
changes in consumer tastes. We must accurately predict these trends and stock
sufficient quantities of popular vitamins, supplements, minerals and other
products and not overstock unpopular products.
If our existing technical and operational systems fail, we could experience
interruptions or delays in our service or data loss, and could be unable to
accept and fulfill customer orders.
We have experienced periodic systems interruptions which we believe may
continue to occur. Our systems and operations, including our fulfillment
operations, are vulnerable to damage or interruption from fire, flood,
earthquake, power loss, telecommunications failure, break-ins, vandalism and
similar events. Substantially all of our product development and information
management systems are in facilities we lease in Massachusetts. All of our
inventory is stored in facilities we lease in Massachusetts. In addition,
substantially all of our computer and communications hardware systems are
located at a third-party facility in Massachusetts. We have no formal disaster
recovery plans, and our insurance may not adequately compensate us for losses
that may occur. The occurrence of a natural disaster or other unanticipated
problems at our facilities in Massachusetts, or at the third-party facility in
Massachusetts, could cause interruptions or delays in our service or data loss,
or could render us unable to accept and fulfill customer orders. In addition,
any failure by the third-party facility to provide the data communications
capacity we require could result in interruptions in our service.
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Our ability to increase our customer base and our sales depends on the
continuing contribution of our key personnel and our ability to attract and
retain other qualified employees in the future.
We may be unable to retain our key employees or attract and retain other
highly qualified employees in the future due to the intense competition for
qualified personnel among Internet related businesses. If we were to lose the
services of Michael I. Barach, our President, Chief Executive Officer and a
director, and Donald J. Pettini, our Chief Technology Officer or any of our
other executive officers or key employees, many of whom joined us since June
1998, we might not be able to increase our customer base and our sales. Any
officer or employee can terminate his or her relationship with us at any time.
We also do not have "key person" life insurance policies covering any of our
employees. Competition for personnel is intense, and qualified technical
personnel are likely to remain a limited resource for the foreseeable future.
Locating candidates with the appropriate qualifications, particularly in the
desired geographic location, can be costly and difficult. We may not be able to
hire the necessary personnel to implement our business strategy, or we may need
to provide higher compensation to such personnel than we currently anticipate.
If we fail to attract and retain sufficient numbers of highly skilled
employees, we may be unable to attract customers and increase our sales.
The loss of third-party content providers could decrease revenues, increase our
expenses and result in a decrease in our stock price.
We believe that consumers become interested in purchasing our products in
part because of the information we include on our Web site, much of which is
licensed from third parties, regarding health conditions, herbal and
homeopathic remedies, drug interactions and our products. The loss of this
content could require us to develop similar content or to obtain content that
is of lower quality or at a higher cost. In addition, we cannot be certain that
we will be able to license additional content on favorable terms or at all.
We depend on a limited number of third-party suppliers for the products we
require to meet customer demands and if we fail to develop or maintain our
relationships with these or our other vendors, the products we offer could
cease to be available to us or could be available only at higher cost or after
a long delay.
We do not have long-term contracts with any of our suppliers. We cannot
assure you that in the future we will be able to procure sufficient quantities
of our products on acceptable commercial terms. In 1998, two suppliers,
Reliance Vitamin Company and Super Nutrition Distributors, accounted for 51% of
our inventory purchases, and in 1997, Reliance Vitamin Company accounted for
44% of the inventory we purchased. Furthermore, we purchase nearly all of our
private label products through one supplier, Reliance Vitamin Company.
The failure of third-party delivery services to promptly deliver products would
impair our ability to maintain good relationships with existing customers,
attract new customers and generate sales.
We rely on third-party carriers, such as the United States Postal Service,
UPS and Federal Express, for product shipments, including shipments to and from
our order fulfillment facility. We are therefore subject to the risks,
including employee strikes and delays due to inclement weather, associated with
these carriers' ability to provide delivery services to meet our shipping
needs.
Product liability claims against us could result in adverse publicity and
potentially significant monetary damages.
Like other retailers, distributors and manufacturers of products that are
ingested, we face an inherent risk of exposure to product liability claims in
the event that the use of the products we sell results in injury. We may be
subjected to various product liability claims, including claims that the
products we sell contain contaminants, are improperly labeled or include
inadequate instructions as to use or inadequate warnings
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concerning side effects and interactions with other substances. We cannot
predict whether product liability claims will be brought against us in the
future or the effect of any resulting adverse publicity on our business.
Moreover, we may not have adequate resources in the event of a successful claim
against us. We do not maintain product liability insurance and do not have
formal indemnification arrangements with the third-party vendors from which we
source our products. Further, our general liability insurance may not cover
product liability claims. If our insurance protection is inadequate and we are
not indemnified by our third-party vendors, the successful assertion of product
liability claims against us could result in potentially significant monetary
damages.
Although many of the ingredients in our products are vitamins, minerals,
herbs and other substances for which there is a long history of human
consumption, some of our products contain innovative ingredients or
combinations of ingredients. There is little long-term experience with human
consumption of some of these innovative product ingredients or combinations in
concentrated form. In addition, interactions of these products with other
similar products, prescription medicines and over-the-counter drugs have not
been fully explored. Although the manufacturer may perform research and tests
in connection with the formulation and production of the products that we sell,
there are no conclusive clinical studies regarding many of our products.
We may be liable for content we provide on our Web site or which is accessed
from our Web site, which could expose us to potentially significant monetary
damages.
As a publisher of Internet content, we face potential liability for
negligence, copyright, patent or trademark infringement, defamation or other
claims based on the nature and content of materials that we publish or
distribute. In the past, plaintiffs have brought such claims and sometimes
successfully litigated them against online services. Although we carry general
liability insurance, our insurance may not cover claims of these types or may
be inadequate to indemnify us for all liability imposed on us. We could be
exposed to potentially significant monetary damages if we were held liable
based on our Internet content.
If there is unfavorable publicity regarding nutritional supplements, our sales
will likely decline.
We believe the vitamins, supplements and minerals market is affected by
national media attention regarding the consumption of nutritional supplements.
Future research reports or publicity that are perceived as less favorable or
that question earlier research or publicity could result in a decline in our
sales. Because of our dependence upon consumer perceptions, adverse publicity
associated with illness or other undesirable effects resulting from the
consumption of the products we sell or any similar products distributed by
other companies, whether or not accurate, also could damage the trust our
customers have in our products and could result in a decline in our sales.
Unfavorable publicity could arise even if the adverse effects associated with
products resulted from consumers' failure to consume such products
appropriately.
Disruptions resulting from the year 2000 problem could require us to incur
significant unanticipated expenses and result in operating losses.
Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year
2000 problem. These failures could cause disruptions of our operations,
including a temporary inability to process customer orders, operate our Web
site or engage in similar ordinary business activities. We may be required to
incur unanticipated expenses to restore our operations to full functionality,
and these disruptions and expenses could result in operating losses.
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Our operations also depend on the performance of operating software and
systems used by our vendors and service providers. We cannot assure you that
our vendors and service providers have, or will have, operating software and
systems that are year 2000 compliant. Year 2000-related failures in the
software or systems of our vendors or third-party service providers could
interrupt our operations or require us to incur significant unanticipated
expenses. In addition, disruptions caused by year 2000 problems could affect
Internet usage generally, which also could require us to incur significant
unanticipated expenses and result in operating losses.
We do not expect to pay dividends, and investors should not buy our common
stock expecting to receive dividends.
We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain future earnings, if any, to finance the expansion of
our business and do not expect to pay any cash dividends in the foreseeable
future. Consequently, you only will realize an economic gain on your investment
in our common stock if the price appreciates. You should not purchase our
common stock with the expectation of receiving cash dividends.
We are subject to anti-takeover provisions in our charter, by-laws and Delaware
law that could delay or prevent an acquisition of our company, even if the
acquisition would be beneficial to our stockholders.
Certain provisions of our certificate of incorporation, our by-laws and
Delaware law could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders. Because of these
provisions, you might not be able to receive a premium on your investment. For
additional information on these anti-takeover provisions, please refer to the
information in this prospectus under the heading "Description of Securities."
Risks of Doing Business Over the Internet
If use of the Internet and growth of the online vitamins, supplements, minerals
and other natural and healthy living products market do not continue, we may
not achieve the critical mass of customers necessary for sustaining revenues
and achieving profitable operations.
Our future revenues and profits, if any, substantially depend upon the
widespread acceptance and use of the Internet as an effective medium of
business and communication by our target consumers. Rapid growth in the use of
and interest in the Internet has occurred only recently. As a result,
acceptance and use may not continue to develop at historical rates, and a
sufficiently broad base of consumers may not use the Internet and other online
services as a medium of commerce. In addition, the Internet may not be accepted
as a viable long-term commercial marketplace for a number of reasons, including
potentially inadequate development of the necessary network infrastructure or
delayed development of enabling technologies and performance improvements. Our
continued growth will depend, in large part, upon third parties maintaining the
Internet infrastructure to provide a reliable network backbone with the speed,
data capacity, security and hardware necessary for reliable Internet access and
services.
Further, the online market for vitamins, supplements, minerals and other
natural and healthy living products is in its infancy, and our participation in
this market began growing only after we launched our redesigned Web site in
late 1998. The market is significantly less developed than the online market
for books, auctions, music, software and numerous other consumer products. Even
if use of the Internet and electronic commerce continues to increase, the rate
of growth, if any, of the online vitamins, supplements, minerals and other
natural and healthy living products market could be significantly less than the
online market for other products. Our rate of revenue growth and prospects for
profitability could therefore be significantly less than that of other online
merchants.
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If we fail to provide adequate electronic commerce security or fail to control
credit card fraud, we could be subject to increased operating costs, as well as
claims, litigation or other potential liability.
Since nearly all of our revenues are derived from credit card transactions,
consumer concerns regarding the security of transactions conducted on our site
and users' privacy may inhibit the growth of use of our site. To transmit
confidential information securely, such as customer credit card numbers, we
rely on encryption and authentication technology that we license from third
parties. We cannot predict whether we will experience compromises or breaches
of the technologies we use to protect customer transaction data. Furthermore,
our servers may be vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions. We may need to expend significant additional
capital and other resources to protect against security breaches or alleviate
problems caused by any such breaches. We cannot guarantee that security
breaches will not occur. Any penetration of our network security or
misappropriation of our users' personal or credit card information could
subject us to liability. We may be liable for claims based on unauthorized
purchases with credit card information, impersonation or other similar fraud
claims. Claims also could be based on other misuse of personal information,
including use for unauthorized marketing purposes. These claims could result in
costly litigation.
Under current credit card practices, merchants are liable for fraudulent
credit card transactions where, as is the case with the transactions we
process, the merchant does not obtain a cardholder's signature. A failure to
adequately control fraudulent credit card transactions could result in
increased operating costs, as well as claims, litigation and other potential
liability.
Privacy concerns may limit the information we can gather, which could limit the
effectiveness of our sales and marketing efforts and cause us to incur
significant additional expenses.
Web sites typically place "cookies" on a user's hard drive without the user's
knowledge or consent. Although some companies refuse to use cookies, we use
them for a variety of reasons, including the collection of data derived from
the user's Internet activity. We use this data to better target our sales and
marketing efforts to our current and prospective customer base. Accordingly,
any reduction or limitation in the use of cookies could limit the effectiveness
of our sales and marketing efforts. Most currently available Web browsers allow
users to remove cookies at any time or to prevent cookies from being stored on
their hard drives. In addition, some commentators, privacy advocates and
governmental bodies have suggested limiting or eliminating the use of cookies.
For example, the European Union recently adopted a directive addressing data
privacy that may limit the collection and use of certain information regarding
Internet users. This directive may limit our ability to target advertising or
collect and use information in certain European countries. In addition, the FTC
and several states have investigated the use by certain Internet companies of
personal information. We could incur significant additional expenses if new
regulations regarding the use of personal information are introduced or if our
privacy practices are investigated.
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Our business is subject to government regulation of the Internet and other
legal uncertainties which could prevent our business from growing or expose us
to unanticipated liabilities.
Existing or future legislation could limit growth in use of the Internet,
which would curtail our revenue growth. Statutes and regulations directly
applicable to Internet communications, commerce and advertising are becoming
more prevalent. The law remains largely unsettled, however, even in areas where
there has been legislative action. It may take years to determine whether and
how existing laws governing intellectual property, privacy, libel and taxation
apply to the Internet, electronic commerce and online advertising. In addition,
the growth and development of electronic commerce may prompt calls for more
stringent consumer protection laws, both in the United States and abroad.
Congress recently passed laws regarding online children's privacy, copyrights
and taxation. In addition, we do not currently collect sales or other similar
taxes for physical shipments of goods into states other than Massachusetts and
Pennsylvania. However, local, state or foreign jurisdictions may seek to impose
sales tax collection obligations on us. If one or more states or any foreign
country successfully asserts that we should collect sales or other taxes on the
sale of our products, it could also prevent our business from growing or expose
us to unanticipated liabilities.
Risks Associated with this Offering
Our management has broad discretion over the use of proceeds from this
offering.
Presently, we intend to use the majority of the proceeds from this offering
for increased advertising and marketing expenditures. The remaining proceeds
will be used to fund operating losses and for general corporate purposes,
including expanding our product and service offerings, enhancing our
infrastructure, Web site development and working capital. We also may use a
portion of the proceeds to expand our business through strategic alliances and
acquisitions. We have not yet determined the amount of net proceeds to be used
specifically for any of the foregoing purposes. As a result, investors in this
offering will be relying on management's judgment with only limited information
about its specific intentions regarding the use of proceeds. We cannot assure
you that the proceeds will be invested to yield a favorable return. Additional
information regarding the ways in which we intend to spend the proceeds of this
offering is included in this prospectus under the heading "Use of Proceeds."
Our officers and directors will control 24.4% of our common stock and will be
able to significantly influence corporate actions.
After this offering, our executive officers, directors and entities
affiliated with them will control approximately 24.4% of our common stock. As a
result, these stockholders, acting together, will be able to significantly
influence all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business combination
transactions.
There is no prior public market for our common stock, and you may not be able
to resell shares of our common stock for a profit.
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in our company will lead to the
development of an active, liquid trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy
and sell orders for investors. The initial public offering price for the shares
will be determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market. The market price of the common stock may decline below the
initial public offering price. A more detailed discussion of the factors to be
considered in determining the initial public offering price is included in this
prospectus under the heading "Underwriting."
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We are likely to require additional financing and may not be able to raise
additional financing on favorable terms or at all.
We currently anticipate that the net proceeds of this offering, together with
current cash and cash equivalents, will be sufficient to meet our anticipated
needs for advertising and marketing expenditures, funding operating losses and
general corporate purposes through at least the next 12 months. We anticipate
that we are likely to need additional financing to execute on our business
model thereafter or sooner if we need to respond to business contingencies.
Such contingencies may include the need to:
. fund additional advertising expenditures;
. develop new or enhance existing site content, features or services;
. enhance our operating infrastructure;
. respond to competitive pressures; or
. acquire complementary businesses or necessary technologies.
If we raise additional funds through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be reduced,
and these newly-issued securities may have rights, preferences or privileges
senior to those of existing stockholders, including those acquiring shares in
this offering. We cannot assure you that additional financing will be available
on terms favorable to us, or at all. If adequate funds are not available or are
not available on acceptable terms, our ability to fund our operations, take
advantage of unanticipated opportunities, develop or enhance our site content,
features or services, or otherwise respond to competitive pressures would be
significantly limited. For a further discussion, please see "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
Market prices of emerging Internet companies have been highly volatile, and the
market for our stock may exhibit volatility as well.
The stock market has experienced significant price and trading volume
fluctuations, and the market prices of technology companies, particularly
Internet companies, have been extremely volatile. Recent initial public
offerings by Internet companies have been accompanied by exceptional share
price and trading volume changes in the first days and weeks after the
securities were released for public trading. Investors may not be able to
resell their shares at or above the initial public offering price. In the past,
following periods of volatility in the market price of a public company's
securities, securities class action litigation has often been instituted
against that company. Such litigation could result in substantial costs and a
diversion of management's attention and resources.
The reliability of the market data included in this prospectus is uncertain.
Since we are a relatively new company and operate in a new and rapidly
changing market, we have included market data in this prospectus from industry
publications, including Packaged Facts and International Data Communications.
Industry publications generally state that the information contained in these
publications has been obtained from sources believed to be reliable, but that
its accuracy and completeness is not guaranteed. Although we believe market
data used in this prospectus is reliable, it has not been independently
verified and we cannot assure you of its reliability.
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New investors will suffer immediate and substantial dilution in the net
tangible book value of their shares.
We expect the initial public offering price to be substantially higher than
the net tangible book value per share of the common stock. Therefore, you will
incur immediate dilution in net tangible book value of $7.64 per share,
assuming an initial public offering price of $12.00 per share. You may incur
additional dilution if holders of stock options exercise their options or if
warrantholders exercise their warrants to purchase common stock. Additional
information regarding the dilution to investors in our initial public offering
is included in this prospectus under the heading "Dilution."
The large number of shares eligible for public sale after this offering could
cause our stock price to decline.
The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of our common stock in
the market after this offering or the perception that such sales could occur.
These sales also might make it more difficult for us to sell equity securities
in the future at a time and price that we deem appropriate. Please see the
information in this prospectus under the heading "Shares Eligible for Future
Sale" for a description of sales that may occur in the future.
Forward-looking statements contained in this prospectus may not be realized.
This prospectus contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are often accompanied by words
such as "believe," "anticipate," "plan," "expect" and similar expressions.
These statements include statements about the market opportunity for online
sales of vitamins, supplements, minerals and other natural and healthy living
products, our business strategy, competition and expected expense levels. Our
actual results could differ materially from those expressed or implied by these
forward-looking statements as a result of various factors, including the risk
factors described above and elsewhere in this prospectus.
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USE OF PROCEEDS
Our net proceeds from the sale of shares of common stock offered by us are
estimated to be approximately $45.0 million, assuming an initial public
offering price of $12.00 per share and after deducting underwriting discounts
and commissions and estimated offering expenses payable by us. If the
underwriters' over-allotment option is exercised in full, we estimate that the
net proceeds we will receive will be approximately $51.9 million.
We intend to use the majority of the proceeds from this offering for
advertising and marketing expenditures. We intend to use the remaining proceeds
to fund operating losses and for general corporate purposes, including
expanding our product and service offerings, enhancing our infrastructure, Web
site development and working capital.
We believe opportunities may exist from time to time to expand our current
business through strategic alliances or through acquisitions of complementary
companies, products or technologies. We may use a portion of the proceeds for
these purposes. We are not currently a party to any contracts, letters of
intent, commitments or agreements and are not currently engaged in active
negotiations with respect to any acquisitions.
We have not yet determined the amount of net proceeds to be used specifically
for any of the foregoing purposes. Accordingly, our management will have
significant flexibility in applying the net proceeds of the offering. Pending
the uses described above, we intend to invest the net proceeds in high-quality,
short-term, interest-bearing securities.
19
<PAGE>
CAPITALIZATION
The following table shows our cash and capitalization as of September 30,
1999:
. on an actual basis;
. on a pro forma basis to reflect the automatic conversion of all of our
convertible preferred stock outstanding as of September 30, 1999 into
9,055,392 shares of our common stock upon the closing of this offering;
and
. on a pro forma as adjusted basis to reflect the sale of the 4,100,000
shares of common stock by us in this offering at an assumed initial
public offering price of $12.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us.
This information should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operation" and our financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
September 30, 1999
----------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------------ ------------ ------------
<S> <C> <C> <C>
Cash and cash equivalents............ $ 27,647,394 $ 27,647,394 $ 72,653,394
============ ============ ============
Long-term portion of notes payable
and capital lease obligations....... $ 12,300 $ 12,300 $ 12,300
Preferred stock:
Series A -- 23,811,358 shares
authorized; 23,316,097 shares
issued and outstanding actual; no
shares issued and outstanding pro
forma and pro forma as adjusted... 233,160 -- --
Series B-1 -- 23,019,375 shares
authorized; 23,019,375 shares
issued and outstanding actual; no
shares issued and outstanding pro
forma and pro forma as adjusted... 230,194 -- --
Series B-2 -- 1,800,000 shares
authorized; no shares issued and
outstanding actual, pro forma and
pro forma as adjusted............. -- -- --
Series C -- 18,958,178 shares
authorized; 18,409,629 shares
issued and outstanding actual; no
shares issued and outstanding pro
forma and pro forma as adjusted... 184,096 -- --
Common stock, $.01 par value,
93,300,000 shares authorized;
1,918,978 shares issued and
outstanding actual; 10,974,370
shares issued and outstanding pro
forma; and 15,074,370 shares issued
and outstanding pro forma as
adjusted............................ 19,190 109,744 150,744
Additional paid-in capital........... 77,417,844 82,533,408 127,498,408
Deferred compensation................ (438,888) (438,888) (438,888)
Accumulated deficit.................. (40,244,479) (44,803,147) (44,803,147)
------------ ------------ ------------
Total shareholders' equity......... 37,401,117 37,401,117 82,407,117
------------ ------------ ------------
Total capitalization............. $ 37,413,417 $ 37,413,417 $ 82,419,417
============ ============ ============
</TABLE>
20
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
$20,707,555, or $1.89 per share of common stock. Pro forma net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding after
giving effect to the conversion of all shares of preferred stock. After giving
effect to the sale by us of 4,100,000 shares of common stock offered by this
prospectus at an assumed initial public offering price of $12.00 per share and
after deducting underwriting discounts and commissions and estimated offering
expenses payable by us, our pro forma net tangible book value as of September
30, 1999 would have been approximately $65,713,555, or $4.36 per share. This
represents an immediate increase in pro forma net tangible book value of $2.47
per share to existing stockholders and an immediate dilution of $7.64 per share
to new investors purchasing shares of common stock in this offering. The
following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $12.00
Pro forma net tangible book value per share as of September 30,
1999........................................................... $1.89
Increase per share attributable to this offering................ 2.47
-----
Pro forma net tangible book value per share after this offering
attributable to new investors................................... 4.36
------
Net tangible book value dilution per share to new investors in
this offering................................................... $ 7.64
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1999, the total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid to us by existing
stockholders and by new investors purchasing shares in this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 10,974,370 72.8% $ 83,035,904 62.8% $7.57
New investors............. 4,100,000 27.2 49,200,000 37.2 12.00
---------- ---- ------------ ----
Total................... 15,074,370 100% $132,235,904 100%
========== ==== ============ ====
</TABLE>
The foregoing tables and calculations are based on shares outstanding on
September 30, 1999 and:
. include 9,055,392 shares of common stock issuable upon the conversion of
all of our outstanding convertible preferred stock outstanding as of
September 30, 1999;
. exclude 1,367,008 shares of common stock issuable upon exercise of all
options outstanding under our 1998 Stock Plan as of September 30, 1999
with a weighted average exercise price of $8.93 per share (132,298 of
which were exercisable as of September 30, 1999); and
. exclude 159,938 shares of common stock issuable upon exercise of all of
our warrants outstanding as of September 30, 1999.
21
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and the notes to those statements appearing elsewhere in
this prospectus and the information under "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The statement of operations
data for years ended December 31, 1996, 1997 and 1998, and the balance sheet
data at December 31, 1997 and 1998, are derived from our audited financial
statements appearing elsewhere in this prospectus. Interim results for the
periods ended September 30, 1998 and 1999 are derived from our unaudited
financial statements appearing elsewhere in this prospectus which, in the
opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of that data.
Historical results are not indicative of the results to be expected in the
future.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
-------------------------------- -------------------------
1996 1997 1998 1998 1999
-------- --------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales............... $ 21,489 $ 193,064 $ 476,549 $ 371,160 $ 2,589,048
Cost of sales........... 10,681 71,484 417,998 225,423 2,263,738
-------- --------- ----------- ----------- ------------
Gross profit.......... 10,808 121,580 58,551 145,737 325,310
Operating expenses:
Selling and
marketing............ 3,564 98,137 3,001,483 1,593,111 25,296,221
Product development... -- -- 2,135,570 1,360,559 4,454,763
General and
administrative....... 87,925 174,725 1,596,663 819,188 4,627,644
-------- --------- ----------- ----------- ------------
Total operating
expenses............. 91,489 272,862 6,733,716 3,772,858 34,378,628
-------- --------- ----------- ----------- ------------
Operating loss.......... (80,681) (151,282) (6,675,165) (3,627,121) (34,053,318)
-------- --------- ----------- ----------- ------------
Interest income
(expense), net......... -- (8,250) 64,481 35,038 659,736
Net loss................ $(80,681) $(159,532) $(6,610,684) $(3,592,083) $(33,393,582)
======== ========= =========== =========== ============
Basic and diluted net
loss per common
share(1)............... $(0.19) $(0.25) $(9.83) $(5.36) $(39.43)
======== ========= =========== =========== ============
Pro forma basic and
diluted net loss per
common share(1)(2)..... $(0.19) $(0.25) $(2.67) $(1.87) $(2.40)
======== ========= =========== =========== ============
Shares used to compute
basic and diluted net
loss per common
share(1)............... 430,474 650,607 672,289 669,972 846,953
Shares used to compute
pro forma basic and
diluted net loss per
common share(1)(2)..... 430,474 650,607 2,479,964 1,920,989 13,892,245
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30, 1999
--------------------- ------------------------
Pro Forma as
1997 1998 Actual Adjusted(3)
-------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents...... $ 4,241 $11,243,943 $27,647,394 $72,653,394
Working capital (deficit)...... (65,439) 12,193,907 17,934,634 62,940,634
Total assets................... 90,306 13,461,613 49,834,599 94,840,599
Total long-term debt, net of
current portion............... 74,930 21,091 12,300 12,300
Total convertible preferred
stock......................... -- 463,354 647,450 --
Total shareholders' equity
(deficit)..................... (91,900) 12,579,472 37,401,117 82,407,117
</TABLE>
- --------
(1) Please see the financial statements and the notes to those statements
appearing elsewhere in this prospectus for the determination of shares used
in computing basic and diluted net loss per common share and pro forma
basic and diluted net loss per common share.
(2) The pro forma data give effect to the conversion of all of our convertible
preferred stock into 9,055,392 shares of our common stock upon the closing
of this offering.
(3) The pro forma as adjusted data give effect to the conversion of all of our
convertible preferred stock outstanding as of September 30, 1999 into
9,055,392 shares of our common stock upon the closing of this offering and
reflect the sale of 4,100,000 shares of common stock offered by us in this
offering at an assumed initial offering price of $12.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
of our company should be read in conjunction with the financial statements and
the notes to those statements appearing elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties.
Overview
We are an online retail store and information site for vitamins, supplements,
minerals and other natural and healthy living products. By offering
approximately 13,000 products on our site, we provide one-stop shopping for
customers, 24 hours a day, seven days a week. Our online store,
www.MotherNature.com, offers educational and authoritative information, broad
product selection, a high level of customer service, competitive pricing and
easy-to-use navigation and search capabilities.
We were incorporated in the Commonwealth of Pennsylvania in December 1995 as
Mother Nature's General Store, Inc. Our founders worked for approximately three
years to establish distribution channels and an online presence as a retailer
of vitamins, supplements, minerals and other natural and healthy living
products. During that time, we developed and managed our own Web site, built
relationships with many vendors in the vitamins, supplements, minerals and
natural and healthy living products industries, established our private label
line and opened our first distribution and customer service center in
Southampton, Pennsylvania. In early 1998, our founders sought to secure
additional financing to expand our business, promote our brand, invest in
infrastructure and technology improvements, and recruit a seasoned management
team to develop and execute on our business model. These efforts resulted in
the completion of our first round of venture capital financing in June 1998. At
that time we reincorporated in the State of Delaware, changed our name to
MotherNature.com, Inc. and began to recruit our current management team.
Shortly after our new management team joined us, we launched our first major
online banner campaigns, including banner and button purchases on major portals
and shopping areas. In late 1998, we redesigned and launched our Web site,
which included an improved user interface, a more flexible, fully-featured
database structure and enhanced integration of content and merchandise. We have
continued to focus on building our organization, developing our technology
infrastructure, further developing and upgrading our Web site, increasing
customer traffic and sales, expanding our product assortment, promoting our
brand and enhancing our fulfillment and customer service operations. In early
1999, we invested in an aggressive, offline advertising campaign, supplemented
by online advertising, business incentive programs, direct marketing and public
relations.
The success of these efforts has been demonstrated by our growth in quarterly
revenues, which have increased from $105,000 in the fourth quarter of 1998, to
$251,000 in the first quarter of 1999, to $704,000 in the second quarter of
1999, to $1.6 million in the third quarter of 1999. In addition, revenues in
October 1999 were approximately $818,000. In order to manage the increase in
our site traffic and revenues, we have expanded and continue to upgrade our
site, order fulfillment operations and organizational infrastructure. This
expansion to date includes enhancing the features and functions on our site,
adding server and database capacity, building our internally developed order
fulfillment and logistics system, moving our order fulfillment center to a
25,000 square foot facility in Springfield, Massachusetts and adding to our
management and employee team, which totaled 163 employees as of September 30,
1999.
In order to finance our rapid growth, we have raised a total of $61.2 million
in venture capital financing since June 1998 from leading firms, such as
CMG@Ventures, Bessemer Venture Partners and North Castle Partners, which have
expertise in investing in both Internet and healthy living companies. In
addition, during this period we secured subordinated debt and lease financing
for up to $3.3 million, none of which has been drawn down to date.
Despite the growth in our revenues, we continue to incur significant net
losses. Through the first nine months of 1999, we incurred a net loss of
approximately $33.4 million. We have not achieved profitability and
23
<PAGE>
expect to incur operating losses for the foreseeable future. We also expect
that the rate at which we incur such losses will increase significantly from
current levels as we continue to incur expenses related to:
. intensifying our brand development;
. expanding our product offerings and Web site content;
. providing promotional benefits to our customers;
. enhancing and upgrading our Web site and our order fulfillment and other
systems;
. expanding our distribution and warehousing facilities;
. developing and renewing strategic relationships; and
. employing additional personnel.
We recognize revenue at the time of shipment. Cash is generally collected in
less than a week as substantially all of our sales are paid for by credit card.
Advertising expenditures are expensed as incurred.
Results of Operations
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Net Sales. Net sales consist of product sales to customers net of product
returns, promotional discounts and coupons, and include shipping and handling
charges. Net sales increased 598% to $2.6 million for the nine months ended
September 30, 1999 from $371,000 for the nine months ended September 30, 1998.
This increase was attributable primarily to volume increases, which were a
result of new product lines, the significant growth of our customer base and an
increase in repeat purchases from our existing customers. We believe that the
increase in our customer base was primarily attributable to the implementation
of our offline marketing strategy.
Cost of Sales. Cost of sales consists primarily of the costs of merchandise,
including outbound shipping costs. Cost of sales does not include the cost of
products associated with promotional discounts and coupons used for new
customer purchases, which are included in selling and marketing expense, but
does include shipping costs in connection with such products. Cost of sales
increased 904% to $2.3 million for the nine months ended September 30, 1999
from $225,000 for the nine months ended September 30, 1998. This increase was
attributable primarily to our increased sales volume. Our gross margin
decreased to 13% of net sales for the nine months ended September 30, 1999 from
39% of net sales for the nine months ended September 30, 1998. This decrease
was due to a number of factors, including increased sales discounts and various
price markdowns or "clearance sale" promotions which resulted in lower realized
selling prices. In addition, in late 1998 we experienced malfunctions in our
information system which attributed incorrect selling prices to various
products. These malfunctions, which have since been rectified, resulted in
erroneous lower selling prices and decreased gross margins on such products.
Gross margins are expected to rise in the future as the effect of a smaller
proportion of revenues derived from higher margin private label products is
offset by additional margins from greater volume discounts on product purchases
and direct sourcing of product from manufacturers.
Selling and Marketing Expense. Selling and marketing expense consists
primarily of advertising and promotional expenditures, including the cost of
products associated with promotional discounts and coupons used for new
customer purchases, Web content expenditures, fulfillment facility expenses and
payroll and related expenses for personnel engaged in marketing, content, order
fulfillment and customer service operations. Selling and marketing expenses
increased to $25.3 million for the nine months ended September 30, 1999 from
$1.6 million for the nine months ended September 30, 1998. This increase was
attributable primarily to expenditures related to our offline and online
advertising and promotional strategy, and product expenditures related to
promotional discounts offered to attract new customers. These amounts were
$20.9 million for the nine months ended September 30, 1999 compared to $961,000
for the nine months ended September 30, 1998.
24
<PAGE>
Since September 30, 1998, we hired 90 employees engaged in marketing, content,
order fulfillment and customer service operations, including a Chief Marketing
Officer and directors and managers for Business Development, Customer Service
and Fulfillment. We intend to continue to pursue an aggressive branding and
marketing campaign and, therefore, we expect selling and marketing expenses to
increase significantly in future periods.
Product Development Expense. Product development expense consists primarily
of payroll and related expenses for merchandising, Web site development, Web
design and information technology personnel and related infrastructure. Product
development expenses increased to $4.5 million for the nine months ended
September 30, 1999 from $1.4 million for the nine months ended September 30,
1998. This increase was attributable primarily to an increase of 44 employees
engaged in product development activities since September 30, 1998 and
associated costs related to enhancing the features, design and functionality of
our online store and increasing the capacity of our transaction-processing
systems. We believe that continued investment in product development is
critical to attaining our strategic objectives and, therefore, we expect
product development expense to increase significantly in future periods.
General and Administrative Expense. General and administrative expense
consists of payroll and related expenses for executive and administrative
personnel, recruiting, professional fees and other general corporate expenses.
General and administrative expenses increased to $4.6 million for the nine
months ended September 30, 1999 from $819,000 for the nine months ended
September 30, 1998. This increase was attributable primarily to increased
company headcount of 141 employees since September 30, 1998 and related expense
associated with additional personnel. We believe general and administrative
expenses will increase as we expect to incur additional costs related to the
growth of our business.
Interest Income (Expense). Interest income (expense), net consists of income
earned on our cash balances in money market accounts partially offset by
expenses attributable to capital lease obligations, commitment fees, warrant
financing and original issue discount related to notes payable. Interest income
(expense) increased to $660,000 for the nine months ended September 30, 1999
from $35,000 for the nine months ended September 30, 1998. This increase was
attributable primarily to earnings on higher average cash and cash equivalent
balances during the first nine months of 1999.
Provision for Income Taxes. We have had net operating losses for every period
through September 30, 1999. We may not be able to utilize all or any of these
tax loss carry-forwards as a result of this offering and prior financings. We
have not recognized a provision for income taxes due to the uncertainty
surrounding the realization of the favorable tax attributes in future tax
returns and we have placed a valuation allowance against our net deferred tax
assets.
Net Loss. As a result of the foregoing factors, we incurred a net loss of
$33.4 million for the nine months ended September 30, 1999 as compared to $3.6
million for the nine months ended September 30, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales. Net sales increased 147% to $477,000 in fiscal 1998 from $193,000
in fiscal 1997. This increase was attributable primarily to volume increases
which were a result of both the significant growth in our customer base and
repeat purchases from existing customers.
Cost of Sales. Cost of sales increased 485% to $418,000 in fiscal 1998 from
$71,000 in fiscal 1997. This increase was attributable primarily to our
increased sales volume and a shift in our product mix toward lower margin
products. In the fourth quarter of 1998, we recorded a charge of approximately
$73,000 related to our reserve for obsolete and slow-moving inventory items. As
a result of these factors and the malfunctions of our information system,
whereby lower prices were charged in error, our gross margin decreased to 12%
of net sales in fiscal 1998 from 63% of net sales in fiscal 1997.
Selling and Marketing Expense. Selling and marketing expense increased to
$3.0 million in fiscal 1998 from $98,000 in fiscal 1997. This increase was
attributable primarily to $1.9 million incurred in 1998 for online
25
<PAGE>
advertising and an increase in staffing and associated costs, as we hired our
Vice President, Brand Marketing and directors of distribution and online
marketing, as well as several other employees needed to implement our marketing
strategy.
Product Development Expense. Product development expense increased to $2.1
million in fiscal 1998 from $0 in fiscal 1997. This increase was attributable
primarily to $830,000 incurred for professional consulting services, $750,000
for the purchase of a developed natural products database and Web site and an
increase in staffing and associated costs, as we hired our Chief Technology
Officer, Executive Producer and directors and managers of content and
technology.
General and Administrative Expense. General and administrative expense
increased to $1.6 million in fiscal 1998 from $175,000 in fiscal 1997. This
increase was attributable primarily to expenditures incurred related to the
growth of our business, including recruiting and professional fees as well as
an increase in staffing and associated costs, as we hired our Chief Executive
Officer and Chief Financial Officer.
Interest Income (Expense). Interest income (expense), net increased to
$64,000 in fiscal 1998 from ($8,000) in fiscal 1997. This increase was
attributable primarily to interest income on higher average cash and cash
equivalent balances during fiscal 1998.
Net Loss. As a result of the foregoing factors, we incurred a net loss of
$6.6 million in fiscal 1998 as compared to $160,000 in fiscal 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. Net sales increased 798% to $193,000 in fiscal 1997 from $21,000
in fiscal 1996. This increase was attributable to volume increases as a result
of the significant growth in our customer base.
Cost of Sales. Cost of sales increased 569% to $71,000 in fiscal 1997 from
$11,000 in fiscal 1996. This increase was attributable primarily to an increase
in sales volume. Our gross profit increased from $11,000 in fiscal 1996 to
$122,000 in fiscal 1997 primarily as a result of our growth in revenues. As a
result, our gross margin increased to 63% of net sales in fiscal 1997 from 50%
of net sales in fiscal 1996.
Selling and Marketing Expense. Selling and marketing expense increased to
$98,000 in fiscal 1997 from $4,000 in fiscal 1996. This increase was
attributable primarily to our increased sales volume.
General and Administrative Expense. General and administrative expense
increased to $175,000 in fiscal 1997 from $88,000 in fiscal 1996. This increase
was attributable primarily to the growth of our business and an increase in
staffing.
Interest Income (Expense). Interest income (expense), net increased to
$(8,000) in fiscal 1997 from $0 in fiscal 1996. This increase in interest
expense was attributable primarily to original issue discount related to a loan
entered into in 1997.
Net Loss. As a result of the foregoing factors, we incurred a net loss of
$160,000 in fiscal 1997 as compared to $81,000 in fiscal 1996.
Liquidity and Capital Resources
From inception until June 1998, we financed our operations through a
combination of loans and equity investments aggregating approximately $208,000.
Since June 1998, we have financed our operations primarily through private
sales of convertible preferred stock. Through September 30, 1999, these private
equity financings totaled $61.2 million.
Net cash used in operating activities was $24.0 million for the nine months
ended September 30, 1999 as compared to $3.2 million for the nine months ended
September 30, 1998. This increase in cash used in
26
<PAGE>
operating activities was attributable primarily to a $29.8 million increase in
net loss, an increase in inventories, prepaid expenses, intangible assets and
other assets, offset in part by increases in accounts payable, accrued
expenses, accrued compensation and depreciation and amortization. Net cash used
in operating activities was $5.0 million in fiscal 1998, as compared to $80,000
in fiscal 1997 and $3,000 in fiscal 1996. In each of these periods our
principal operating cash requirements were to fund our net loss, offset in part
by increases in accrued expenses. The significant increase in working capital
in fiscal 1998 was due primarily to significant growth in our operations.
Net cash used in investing activities was $2.3 million for the nine months
ended September 30, 1999 as compared to $281,000 for the nine months ended
September 30, 1998. Net cash used in investing activities was $1.2 million in
fiscal 1998, as compared to $28,000 in fiscal 1997 and $5,500 in fiscal 1996.
The increase was attributable primarily to purchases of property and equipment.
In each period, net cash used in investing activities consisted primarily of
purchases of property and equipment.
Net cash provided by financing activities was $42.6 million for the nine
months ended September 30, 1999 as compared to $7.2 million for the nine months
ended September 30, 1998. In the first nine months of 1999, we received $43.6
million from the issuance of convertible preferred stock. Net cash provided by
financing activities was $17.4 million in fiscal 1998, as compared to $111,000
in fiscal 1997 and $9,000 in fiscal 1996. Net cash provided by financing
activities for fiscal 1998 consisted primarily of proceeds of $17.5 million
from the issuance of convertible preferred stock. In fiscal 1997, net cash
provided by financing activities consisted primarily of proceeds of $89,000
from stockholder advances and notes payable and $25,000 in connection with the
issuance of common stock. In fiscal 1996, net cash provided by financing
consisted primarily of proceeds from stockholder advances.
As of September 30, 1999, we had $27.6 million of cash and cash equivalents.
As of that date, our principal commitments consisted of obligations outstanding
under capital leases in the amount of $1,700 and media purchase commitments of
$11.8 million. Although we currently have no material commitments for capital
expenditures, we anticipate that our business model will require us to commit
resources to promote our brand aggressively, expand our product and service
offerings, and enhance our infrastructure. Our media purchases generally
require a one to three month advance commitment, though some of these
commitments may be resaleable.
We currently anticipate that the net proceeds of this offering, together with
current cash and cash equivalents, will be sufficient to meet our anticipated
needs for working capital and capital expenditures through at least the next 12
months. We anticipate that we are likely to need additional financing to
execute our business model after that 12-month period or sooner if we need to
respond to business contingencies, such as funding additional advertising
expenditures, developing new or enhancing existing content, features or
services, enhancing our operating infrastructure, responding to competitive
pressures, or acquiring complementary businesses or technologies. If we raise
additional funds through the issuance of equity, or convertible debt
securities, the percentage ownership of our stockholders will be reduced, and
these newly-issued securities may have rights, preferences or privileges senior
to those of existing stockholders, including those acquiring shares in this
offering. We cannot be certain that additional financing will be available to
us on favorable terms when required, or at all.
Year 2000 Readiness Disclosure
Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year
2000 phenomenon. For example, we are dependent on the financial institutions
involved in processing our customers' credit card payments for product orders
and on a third party that hosts our servers. We are also dependent on
telecommunications vendors to maintain our network and the United States Postal
Service and other third-party carriers to deliver orders to customers.
27
<PAGE>
We have reviewed the year 2000 compliance of our internally developed
proprietary software. Since our inception, we have internally developed
substantially all of the systems for the operation of our Web site. These
systems include our online search and navigation capabilities, customer service
and transaction-processing and fulfillment functions, as well as firewall,
security, monitoring and back-up capabilities. Based upon our assessment to
date, we believe that our internally developed proprietary software is year
2000 compliant.
We are currently assessing the year 2000 readiness of our third-party
supplied software, computer technology and other services of our vendors. Based
upon the results of this assessment, we will develop and implement, if
necessary, a remediation plan with respect to third-party software, third-party
vendors and computer technology and services that may fail to be year 2000
compliant. At this time, the expenses associated with this assessment and
potential remediation plan are expected to be insignificant. The failure of our
software and computer systems and of our third-party suppliers to be year 2000
compliant could require us to incur significant unanticipated expenses.
The year 2000 readiness of the general infrastructure necessary to support
our operations is difficult to assess. For instance, we depend on the integrity
and stability of the Internet and NaviSite, Inc., our Web site hosting service,
to provide our services. We also depend on the year 2000 compliance of the
computer systems and financial services used by consumers. A significant
disruption in the ability of consumers to reliably access the Internet or
portions of it or to use their credit cards would decrease the demand for our
services and could result in a decline in sales.
We have not incurred any costs to date to address the year 2000 phenomenon
since our systems were initially designed and built with year 2000 readiness in
mind. At this time, we have not yet developed a formal contingency plan to
address situations that may result if our vendors are unable to achieve year
2000 compliance because we currently do not believe that such a plan is
necessary. The cost of developing and implementing such a plan, if necessary,
could be material. Any failure of our systems, our vendors' systems or the
Internet to be year 2000 compliant could have material adverse consequences for
us. Those consequences could include difficulties in operating our Web site
effectively, taking product orders, making product deliveries or conducting
other fundamental parts of our business, such as operating our internal
accounting database and security systems.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, requiring computer software
costs associated with internal-use software to be expensed as incurred until
certain capitalization criteria are met. We adopted SOP 98-1 for the year ended
December 31, 1998. Adoption of this statement did not have a material impact on
our financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, Reporting on Costs of Start-Up
Activities, requiring all costs associated with preopening, preoperating and
organization activities to be expensed as incurred. We have adopted the
statement for the year ended December 31, 1998 and have expensed all costs of
start-up activities.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. As issued, SFAS 133 is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999, with
earlier application encouraged. In May 1999, the FASB delayed the effective
date of SFAS 133 for one year, to fiscal years beginning after June 15, 2000.
We do not currently nor do we intend in the future to issue derivative
instruments and therefore do not expect that the adoption of SFAS 133 will have
any impact on our financial position or results of operations.
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BUSINESS
Overview
We are an online retail store and information source for vitamins,
supplements, minerals and other natural and healthy living products. Through
our innovative combination of content and commerce, we intend to establish
MotherNature.com as the preferred destination for consumers interested in
natural and healthy living products. We currently offer approximately 13,000
products on our site and can special order additional products through our
supplier relationships. We continue to increase our product assortment. In
addition, we provide educational and authoritative news and information about
our products and healthy living in general, which we integrate with our product
offerings in an easily accessible way. We are building the MotherNature.com
brand and increasing our customer base through an aggressive mass-media
advertising program that promotes our memorable name. Through these marketing
efforts, we are seeking to establish MotherNature.com as a trusted advisor to
our growing online community, which includes approximately 136,000 registered
members as of September 30, 1999.
Industry Background
Growth of the Internet and Electronic Commerce
The Internet has become an increasingly significant medium for communication,
information and commerce. According to International Data Corporation (IDC),
there were approximately 142 million Internet users worldwide at the end of
1998, and this number is expected to grow to approximately 398 million users by
the end of 2002. The total value of services and products purchased over the
Internet grew from approximately $296 million at the end of 1995 to
approximately $50 billion at the end of 1998, according to IDC. IDC estimates
that this amount will increase to approximately $733 billion by the end of
2002. According to IDC, worldwide business-to-consumer sales over the Internet
are expected to increase from approximately $15 billion in 1998 to
approximately $116 billion by 2002. We believe that this dramatic growth
presents significant opportunities for online retailers.
The Vitamins, Supplements, Minerals and Natural Products Market
According to Packaged Facts, a consumer products market research firm, sales
of vitamins, supplements and minerals totaled approximately $8.9 billion in
1998 and are expected to grow to approximately $16.6 billion by 2003, a
compound annual growth rate of 13.3%. We believe that several factors are
driving this growth, including a rapidly growing segment of the population that
is concerned with aging and disease, a growing interest in preventative health
care, favorable consumer attitudes toward natural products and a favorable
regulatory statute, the Dietary Supplement Health and Education Act of 1994.
Additionally, public awareness of the positive effects of vitamins and other
nutritional supplements on health has been heightened by widely publicized
reports of favorable research findings. According to data published by Packaged
Facts, 56% of U.S. adults took vitamins in 1998, up from 43% in 1993. We
believe, based upon this data, that 78% of these adults now take vitamins at
least once a day.
The vitamins, supplements and minerals market is a subset of the broader
natural products market, which includes product categories such as personal
care products, household and other general merchandise, perishable and non-
perishable foods, organic coffees and teas, sports nutrition, cosmetics, baby
care products and pet care products. Due to the size of this market and the
absence of a dominant online natural products retailer, we believe that
additional opportunities for online sales within the broader natural products
market also exist.
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Limitations of Traditional Retailers of Vitamins, Supplements, Minerals and
Natural Products
We believe that traditional retailers of vitamins, supplements, minerals and
other natural and healthy living products face several challenges in providing
a satisfying shopping experience for consumers, including:
. Lack of information and product guidance. The typical retail shopping
experience can be confusing and often lacks timely, relevant and
credible information to educate and guide the consumer to an effective
product solution. In particular, retail stores offer consumers limited
means to choose among many products or to select the appropriate product
for a given condition other than by asking store personnel who may not
be knowledgeable. Further, researching a product or health condition in
a retail store can be difficult due to the lack of easily accessible
reference materials.
. Lack of convenience and privacy. Traditional retailers have limited
store hours and locations. Traditional retailers are also unable to
provide consumers with privacy while shopping, as consumers must often
reveal personal health conditions when asking store personnel for
product advice.
. Limited product assortment. The capital and real estate intensive nature
of store-based retailers limit the product selection that can be
economically offered in each store location.
. Lack of customer information and communication. Traditional retailers
cannot easily obtain demographic information about their customers,
which prevents them from customizing product presentation and selection
and undertaking focused direct marketing activities. Traditional
retailers often have little interaction with their customers and most
are unable to establish ongoing communication with them.
As a result of the foregoing limitations, we believe there is significant
unmet demand for an alternative shopping channel that can provide consumers of
vitamins, supplements, minerals and other natural and healthy living products
with a broad array of products, a wealth of news and information to help them
research and select products and a convenient and private shopping experience.
The MotherNature.com Solution
We attract and retain consumers through the following key attributes of our
site:
Educational and Authoritative Information. Our online store is designed to
inform consumers and assist them in making appropriate, educated purchase
decisions. Through our Healthy Living Library, our users can access timely and
authoritative literature on all aspects of healthy living, including over 3,000
articles, news clips, excerpts from Rodale books and encyclopedia entries from
the Encyclopedia of Natural Health included on our site, as well as narratives
on health conditions, natural remedies, products and recent developments. Our
site offers a wealth of internally developed and third-party licensed content
developed by physicians, nutritionists and other health professionals. The
content on our site is based on research and studies published in prominent
medical journals, such as the Journal of the American Medical Association, the
Lancet and the New England Journal of Medicine, as well as news articles and
various other books and periodicals. Through our recent alliance with Rodale,
we have the right to offer the contents of over 150 healthy living books and
certain columns from Prevention magazine.
Integration of Content and Commerce. Our site integrates information on
healthy living and specific health conditions with access to products, and
thereby provides comprehensive solutions to consumer concerns. Consumers can
use our content to search for and research specific products or brands or to
locate products targeted to their particular lifestyle or special interest.
Alternatively, consumers can research and shop for a specific health concern by
browsing our Healthy Living Library, which includes the Encyclopedia of Natural
Health, or the library of Rodale books and selecting from natural solutions
merchandised through links to the content. For example, under a discussion of
"depression," consumers are presented with a targeted selection of natural
products, including "St. John's Wort," with a "click to buy" option. The
consumer also has the option of selecting from a set of our product
recommendations, called "solution baskets," which we have created to address
particular health concerns.
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Convenient and Private Shopping. Our Web site is easily accessible for
shopping 24 hours a day, seven days a week. Consumers shop in the privacy of
their home, or office, and can comfortably research sensitive health concerns
and purchase products that they might be uncomfortable purchasing in a retail
store. We offer consumers four easy ways to shop our site: by Department, by
Ailment, by Brand and by Gender/Age. Consumers can also shop for a particular
product by using our Products A to Z index. Our Web site also provides a number
of features which make the shopping process more convenient. For example, we
have simplified the reordering process by enabling customers to select their
past orders for reorder with one click. In addition, we provide each customer
with a personal shopping list of every product the customer has previously
ordered, which allows quick and easy selection of specific items for reorder.
We also offer a personal shopper service in which a customer service
representative finds desired products and information for those customers that
complete an online request form.
Broad Expandable Product Assortment. Our product selection is substantially
larger than that offered by store-based retailers. We offer approximately
13,000 vitamins, supplements, minerals and other natural and healthy living
products on our site, and provide customers with the ability to order
additional products through our suppliers. Our online store is easily
expandable to include additional natural and healthy living products and
related services we may add in the future. Our current product offerings
include such categories as: Vitamins, Herbs & More; Diet & Fitness; Natural
Therapies; Aromatherapy & Candles; Bath & Body; Books & Entertainment; Home &
Fashion; Nature's Grocery; and Pet Products. We organize our broad product
assortment by allowing consumers to search by brand, product, health concern,
lifestyle or special interest or product category.
Customer Information and Ongoing Communication. We use e-mail to provide
order status and shipping confirmation, to inform customers of news stories
which relate to their particular past purchases and to respond to customer
service inquiries. In addition, we use e-mail to send our customers a bi-weekly
newsletter which is also made available on our Web site. Through the member
registration process we can determine the demographics of our customer base and
can use this information to customize our Web site and product and service
offerings, thereby enabling us to better address certain demographic segments
of our customer base.
The MotherNature.com solution also includes quality customer service, rapid
product delivery and e-mail order confirmation. Through our warehouse and
distribution center, we can manage inventory levels based on customer demand
and indicate on our site which products are in stock. In addition, we are
developing the MotherNature.com community to provide consumers with a forum for
sharing natural and healthy living product experiences, ideas and advice.
Our Strategy
We intend to establish MotherNature.com as the leading online retailer and
information site for vitamins, supplements, minerals and other natural and
healthy living products. Our strategy for growing our business includes the
following:
Promote the MotherNature.com Brand. We intend to promote our highly memorable
brand name through the aggressive use of traditional offline advertising, the
promotion of our private label products and the selective use of online
advertising, direct marketing and public relations. In particular, we believe
our offline advertising campaign has been and will continue to be successful in
rapidly building awareness of our brand in the geographic markets we target. We
recently broadened this advertising campaign from radio, newspaper, magazine
and outdoor media to include a national television campaign, which we commenced
in late August 1999.
Establish MotherNature.com as the Trusted Authority for Vitamins,
Supplements, Minerals and Other Natural and Healthy Living Products. Through
our marketing efforts, we intend to establish our Web site as a
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trusted consumer resource by providing informative and authoritative content
that will differentiate our Web site from those of our competitors. We believe
the content on our site, including the Encyclopedia of Natural Health, the
numerous articles and news clips from leading sources, the library of Rodale
books, and the authoritative contributions of our staff of health
professionals, provides consumers with trustworthy information to conduct
thorough research on hundreds of health conditions and vitamins, supplements,
minerals and other natural and healthy living products. We have established a
Medical Advisory Board comprised of health professionals, including:
. Lee Lipsenthal, M.D., an internist;
. Professor Edmund R. Burke, Ph.D., an exercise physiologist;
. Stephen T. Sinatra, M.D., F.A.C.C., a cardiologist;
. Nicholas V. Perricone, M.D., a dermatologist;
. Robert J. Barry, Ph.D., a biochemist;
. Dr. Tori Hudson, N.D., a naturopathic physician; and
. Robert A. Ronzio, Ph.D., C.N.S., F.A.I.C., a scientist.
Members of our Medical Advisory Board are responsible for making individual
content contributions and for providing our editorial staff with guidance on
developing and reviewing content as requested. We intend to further develop our
community and establish trust with consumers by providing question and answer
sessions with members of our Medical Advisory Board.
Promote Repeat and Complementary Purchases. We intend to capitalize on the
inherent need for regular replenishment of vitamins, supplements and minerals
by promoting repeat sales through features including automatic reorder,
personalized nutritional supplement programs, customer profiling, loyalty
programs and targeted news feeds. We also plan to introduce impulse items at
checkout, first with standard products and later with highly targeted items
based on the contents of the consumer's shopping basket. As we offer a broader
range of natural products, we intend to provide consumers with natural
alternatives to frequently used products such as household detergents, pet
foods and cosmetics.
Develop Business Incentive Programs. We intend to enlist and provide
financial incentives for primary care physicians, alternative health providers,
corporate health plans, HMOs and physician networks, wellness centers and
health clubs to generate additional revenue opportunities by referring their
clients to our Web site. We believe that our relationships with these
businesses and individuals will increase consumer traffic to our site, provide
some additional content as well as provide additional sources of content and
enhance the credibility of our site.
Provide Quality Customer Service. We intend to provide our customers with a
high level of service, primarily through our in-house distribution center. We
are increasing inventory levels of popular products and have moved to a new
25,000 square foot order fulfillment facility, located adjacent to a U.S.
Postal Service Priority Mail processing center, that has expanded our
warehousing and rapid distribution capacity. We believe that our control over
our distribution center will enable us to fill customer orders more promptly
and maintain higher customer satisfaction levels. We also endeavor to provide
quality customer service through e-mail communications and our responsive call
center.
Expand Presence in International Markets. We believe that there are
significant opportunities in the vitamins, supplements, minerals and other
natural and healthy living products markets internationally, particularly in
Asia, the United Kingdom and Canada. As an online retailer, we believe that we
will be able to effectively penetrate and serve these international markets. We
intend to expand our international sales by translating our Web site into
several foreign languages and advertising in those strategically selected areas
where we believe a substantial market may exist.
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Our Site
Shopping Our Store
From the MotherNature.com home page, consumers can shop in four ways:
. By Department. Consumers can search for products among the 9 product
departments on our Web site, such as Vitamins, Herbs & More, Natural
Therapies, Pet Products and Books & Entertainment.
. By Gender/Age. Consumers can search for products and read articles
specific to their gender or age among four main categories: Men, Women,
Children and Seniors.
. By Ailment. Consumers can search for products related to over 100 health
concerns included in the Concerns From A-Z category.
. By Brand. Consumers can search for their favorite brand and can browse
the various categories of products which are provided for each listed
brand.
In addition, consumers can search for their favorite product in the Products
A to Z Index. We also alert consumers to special values, new products, product
promotions and new merchandise categories. For example, consumers can easily
locate product specials on our "On Sale Now" page and new product offerings on
our "What's New" page. Also, our home page features our best-selling products
and promotes various "Featured Specials."
Our Web site offers several personalized services. We provide our members
with a free bi-weekly e-mail newsletter containing timely news stories and
articles, as well as product specials which are designed to encourage customer
purchases. In addition, customers can choose to receive free direct e-mail news
clippings on over 40 health topics.
Our site offers consumers an easy and convenient shopping experience.
Consumers simply click on a button to add products to their virtual shopping
baskets. As they browse, consumers can add and subtract products from their
shopping baskets prior to making a final purchase decision. We deduct
promotional dollars from the purchase price of products, eliminating the need
to cut coupons. Customers who shop using our personal shopper feature are sent
an e-mail when their basket has been filled by one of our customer service
representatives, leaving them one click away from purchasing. To submit orders,
customers click on the "Proceed to Check Out" button and are prompted to supply
shipping and credit card details online, or by e-mail, phone or facsimile. A
variety of shipping options are offered and large orders receive shipping
discounts. Customers are provided with automated e-mail order verification,
back-order processing and shipping confirmation. Upon their first order, every
MotherNature.com customer is assigned a password-accessible personal account
number. This "Your Account" function allows customers to easily view current
order status and previous order contents and to select past orders for one-
click reorders.
Our Content
Our site offers a wealth of authoritative and educational content. We believe
that our integration of content and commerce results in a more rewarding
shopping experience for consumers. We have established a Healthy Living Library
on our site that includes content from Rodale books as well as over 3,000
articles, news clips and encyclopedia entries from the Encyclopedia of Natural
Health, and narratives on health conditions, natural remedies, products and
recent developments, all of which are designed to provide credible information
and assist consumers with their purchase decisions. This information will be
supplemented as we continue to add content from Rodale books and columns from
Prevention as part of our searchable online library. A key component of our
merchandising strategy is our ability to link relevant product offerings
throughout the text of the various articles, encyclopedia entries and other
narratives displayed on our Web site.
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This strategy enables us to more effectively market our products, since
consumers are able to research a specific health concern and at the same time
access the natural product solutions mentioned within the content. Our News &
Views section alerts consumers to timely news stories regarding vitamins,
supplements, minerals and other healthy living issues, while enabling us to
highlight applicable product offerings.
The Encyclopedia of Natural Health is based on content licensed from
Healthnotes, Inc. and incorporates information gathered from over 500
authoritative scientific and medical journals, such as The Journal of the
American Medical Association, the Lancet and the New England Journal of
Medicine. The Encyclopedia home page displays six main categories of
encyclopedia entries, thereby enabling consumers to easily search its contents.
For example, under the "Health Concerns" category, the entries address over 125
health concerns and helpful dietary supplements. Under the "Herbs & Botanicals"
category, a consumer can find reviews covering 150 herbs, which include
information on where the herbs are grown and their historical or traditional
uses.
In addition, our site includes internally developed content, such as our
"Consumer Guides," our bi-weekly newsletter and a section devoted to recent
news stories, as well as content licensed from third parties, such as the
American Botanical Council. Members of our Medical Advisory Board write
articles, columns and narratives for inclusion on our site, review and critique
selected portions of our content, provide advice and guidance to our editorial
staff and assist in developing our solution baskets. Medical Advisory Board
members also assist us in preparing articles on new product or market
developments, including responses to current media publicity regarding
vitamins, supplements and minerals.
We have incorporated a number of books from Rodale's collection of books on
vitamins, supplements, minerals, natural healing, alternative medicine, home
health and cooking as well as the "Supplement News" and "Alternative Medicine
News" columns from recent issues of Prevention magazine as part of a topic
sensitive, cross-indexed central library on our site. Consumers are able to
search for information on specific topics and can link to relevant excerpts or
entire text entries from Rodale books. Our site already includes the complete
text of several of Rodale's best selling titles, including "Herbs for Health &
Healing" and "Prevention's Healing with Vitamins," and more titles are expected
to be added to the library. During the ten-year term of our agreement with
Rodale, we will be able to include future books or chapters on vitamins,
supplements, minerals, natural healing, alternative medicine, home health and
cooking as part of our online library.
Our Community
We are building an active community dedicated to educating consumers about
vitamins, supplements, minerals, healthy living and natural products. We are
also developing interactive tools for the site in order to provide a fulfilling
shopping experience and to build a sense of community among our customers. We
currently provide direct e-mail news clippings and several community message
boards, including boards on herbs, weight control, natural pet care, sports
nutrition and women's health, which are monitored by qualified professionals
and which enable consumers to ask and respond to each other's questions. We
recently added an "Ask Our Experts" section to enable consumers to ask
questions of our Medical Advisory Board members and have included sections
devoted to health quizzes and astrology. Future plans include the introduction
of additional message boards, live advice forums hosted by members of our
Medical Advisory Board and special guests and customer testimonials.
Marketing and Site Promotion
Our marketing strategy is designed to strengthen the MotherNature.com brand
name, increase traffic to the MotherNature.com store, build strong customer
loyalty, maximize repeat purchases and develop incremental revenue
opportunities. We believe our offline advertising campaign, launched in March
1999, has proven to be especially successful in achieving these objectives.
Therefore, we intend to continue to promote the MotherNature.com brand through
aggressive offline advertising as well as through online advertising, business
incentive programs, direct marketing and public relations. Our marketing
efforts are targeted at active, health- conscious adults and consist of:
Offline advertising. We are committing significant resources to building our
brand name by using print, radio and outdoor advertising campaigns. To assist
us in developing our offline advertising campaigns, we have
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retained Ogilvy & Mather Worldwide as our agency of record for both creative
and media planning and buying. Our first major offline campaign commenced in
early March 1999 and was primarily targeted at the metropolitan areas of
Boston, New York City, San Francisco and Seattle. In May and June, the campaign
was expanded to include several additional cities, including Los Angeles,
Detroit, Dallas, Denver, Chicago, Washington D.C., Houston, Philadelphia and
Phoenix, representing over 30% of the United States' population. This campaign
was intended to increase consumer awareness of our Web site and was comprised
of radio advertisements, print advertisements in newspapers, including The New
York Times, The Boston Globe and The San Francisco Chronicle, regional editions
of national magazines, such as People Magazine, and outdoor media such as
billboards. Targeted ads were also placed in natural products and health-
related magazines and relevant sections of national newspapers. The radio
advertisements featured recognized and celebrity voices, including the voice of
actress Blythe Danner as "Mother Nature."
In late August 1999, we unveiled our second offline campaign, a major
national brand-building campaign that includes television commercials as well
as radio and print advertisements. This campaign seeks to build on our brand
awareness and establish us as a trustworthy information source and online
retailer. The radio and television advertisements feature a Mother Nature
character as a spokesperson for us. The television commercials have aired
during major events such as Major League Baseball playoff games, the U.S.
Tennis Open, the Ryder Cup and the Emmy Awards as well as other highly rated
programs that reach our target market.
Other advertising. We are using online advertising, direct marketing and
public relations in our marketing strategy. Our online strategy involves
selective advertising on the Web sites of major Internet content and service
providers and targeted health-related Web sites. We have established hypertext
links on sites including Yahoo! and America Online Shopping Channels. In
addition, we have established an affiliates program which allows third parties
to receive commissions for sales generated by customers that hyperlink to
MotherNature.com from the third-party site.
We will continue to refine our direct marketing campaign by tailoring
offerings to the demographics of our targeted audience. Currently, our direct
marketing activities consist of our bi-weekly newsletter, e-mail and regular
mail postcards, and special inducements. In the future, we will direct market
to Rodale's expansive database of more than 25 million customers who have
demonstrated their interest in healthy living.
We have engaged a public relations firm to generate media interest in our
site through editorial coverage in business, consumer and industry trade
publications. Our first public relations event, "Stress Relief for a Taxing
Day," was held on April 15, 1999 in Boston, New York, San Francisco and
Seattle, where we handed out samples of our private label Kava Kava, a natural
stress reliever, to persons mailing their income tax returns.
Our latest public relations initiative is our national health education
campaign entitled "Live Better." The campaign will address health related
topics, provide information on how to maintain good health and consist of
seminar presentations, interactive chats on our Web site and the creation and
publication of various brochures. We have engaged Gayle Reichler, M.S., R.D.,
C.D.N. to act as a spokesperson for the campaign. The first stage of the
campaign will center around our recently published brochure, Live Better: A
Guide for Women, which Ms. Reichler will discuss in an online chat with
consumers on our site later this Fall. Ms. Reichler received a Masters degree
in Food and Nutrition from New York University and has appeared on several
television shows, including the Weekend Today Show, CBS News, The View with
Barbara Walters and the Food Network, as well as in national newspapers and
magazines, including The New York Times, Fitness and Women's Day.
Business incentive programs. We believe we can increase traffic to our site
and acquire loyal customers through the establishment of business incentive
programs. We intend to enlist and provide financial incentives for primary care
physicians, alternative health providers, corporate health plans, HMOs and
physician networks, wellness centers and health clubs to generate additional
revenue opportunities through the promotion of VSM and other natural and
healthy living product purchases and referrals to our Web site. We believe that
our relationships with these businesses and individuals will increase consumer
traffic to our site, as well as provide additional sources of content and
enhance the credibility of our site.
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Our Products
Products we offer. The following is a representative sampling of the products
offered on our Web site:
<TABLE>
<CAPTION>
Vitamins Supplements Minerals Herbs Bath & Body Teas
- -------- ----------- -------- ----- ----------- ----
<S> <C> <C> <C> <C> <C>
Beta Carotene Acidophilus Boron Alfalfa Acne Products Aloe
Bioflavonoids Adrenal Supplements Calcium Anise Seed After Shave Anise
Biotin Antioxidants Chromium Bayberry Aloe Vera Gels Antioxidant
Children's Vitamins Bee Pollen Copper Calendula Bar Soaps Assorted Herbal
Choline Borage Dolomite Echinacea Body Lotions Black Currant
Folic Acid Bran Germanium Elderberry Cosmetics Chai
Inositol Brewer's Yeast Iron Ginkgo Biloba Deodorants Chamomile
Multivitamins Chlorella Magnesium Ginseng Facial Cleanser Dandelion
Niacin Creatine Silica Kava Root Shaving Cream Ginseng
Paba DHEA Potassium Goldenseal Root Foot Care Products Dong Quai
Pantothenic Acid CLA Selenium Hyssop Massage Oil Fennel
Pyridoxine Cod Liver Oil Zinc Saw Palmetto Sun Care Green
Rutin Evening Primrose Oil St. John's Wort Melatonin
Vitamins A-E Glucosamine
Lecithin
</TABLE>
<TABLE>
<CAPTION>
Homeopathy Aromatherapy Books Pet Supplies General Merchandise
- ---------- ------------ ----- ------------ -------------------
<S> <C> <C> <C> <C>
Belladonna All Spice Oil Allergies Catnip Air Fresheners
Cell Salts Camphor Oil Arthritis Grooming Products Candy/Gum/Mints
Fever Remedies Cedar Oil Ayurvedic Medicine Herbal Collars Coffee
Headache & Migraine Clove Oil Cooking Pet Books Comforters
Remedies Grapefruit Oil Depression Pet Foods Diapers
Heartburn Remedies Hyssop Oil Gardening Pet Supplements Feminine Care
Nux Vomica Jasmine Oil Herbs Toys Household Cleaners
Oscillococcinum Lavender Oil Homeopathy Juicers & Pulp Extractors
Sabina Orange Oil Juices Lip Balm
Sepia Patchouli Oil Sports Nutrition Paper Products
Rosemary Oil Supplements Pillows
Vitamin Accessories
& Pill Crushers
</TABLE>
Product sources. We purchase products from several distributors and
manufacturers. We carry inventories of all of our private label products and
selected, higher-turnover branded items and arrange rapid fulfillment from
major distributors and manufacturers for the remainder of our product
offerings. We market and distribute merchandise from national brands such as
Natrol, Twinlab and NatureMade, and we also carry approximately 375 products
under our own private label brand, MotherNature.com, which is manufactured
primarily by Reliance Vitamin Company. To the extent available, our private
label products are displayed first on any search list. In the nine months ended
September 30, 1999, no one national brand accounted for more than 10% of sales.
During the same period, sales of MotherNature.com branded products accounted
for 45% of sales. However, we expect that sales of MotherNature.com branded
products will account for a smaller percentage of sales in future periods as a
result of our recent commencement of promotions of all of our products, not
just our private label brand.
Product and service offering expansion. Consistent with our objective of
becoming the preferred destination for consumers interested in natural and
healthy living products, we intend to expand our product and service offerings
to address the broader natural products market. We recently added a pet
supplies category and a home and fashion category of products to our Web site.
In addition, we recently began offering a private label line of organic coffees
and soaps on our site. We intend to expand our existing product and service
offerings to include the following: pre-packaged dry foods, allergy products,
recycled cards and stationery and spa and travel. We also intend to expand the
products offered under our private label to include these and other categories.
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Our Relationship with Rodale
In September 1999, we entered into a strategic relationship with Rodale which
will provide us with access to a wealth of healthy living content to add to our
site as well as access to Rodale's expansive database of over 25 million
customers. We believe this relationship will significantly increase the quality
and depth of our Web site's content by enabling us to include Rodale's books on
vitamins, supplements, minerals, natural healing, alternative medicine, home
health and cooking. Rodale has agreed not to license this content to our
competitors' Web sites for a period of five years after the content first
appears on our Web site. Our agreement with Rodale extends for a period of ten
years with respect to our right to include existing and future Rodale books on
our site. We also will be able to publish the "Supplement News" and
"Alternative Medicine News" columns of Rodale's well-known Prevention magazine
on our site. In addition, MotherNature and Rodale have agreed to undertake
cross-marketing activities that will promote each other's businesses. For
instance, we will sell Rodale books and receive access to Rodale's database of
over 25 million customers and be able to include promotional materials in
Prevention and other Rodale customer mailings. We believe these activities, and
specifically our access to Rodale's database of customers, will provide us with
the opportunity to attract consumers who are particularly interested in natural
and healthy living to our site.
In connection with this relationship, we issued to Rodale 974,044 shares of
our common stock and agreed to use our best efforts to secure the nomination of
a representative of Rodale to our board of directors for so long as Rodale owns
at least 4% of our common stock. We expect that Placido Corpora, President of
Rodale's Book Division and Managing Director of Rodale's Interactive Division,
will be appointed as a director of MotherNature after the completion of this
offering. As part of the relationship, both we and Rodale agreed to certain
exclusivity provisions that will limit our ability to sell print books or print
magazines, and will preclude Rodale from selling vitamins, supplements,
minerals, drugstore or certain other natural and healthy living products. See
"Management--Executive Officers and Directors" and "Principal Stockholders."
Customer Support
We believe that a high level of customer service and support is critical to
retaining and expanding our customer base. Our customer service representatives
are currently available from 9 a.m. to 9 p.m. Eastern time, Monday through
Friday, to provide customer assistance by e-mail or telephone. Our customer
service representatives handle questions about orders and how to navigate our
Web site and assist customers in finding desired products. In addition, we
provide each customer with automated e-mail order verification, back-order
processing and shipping confirmation. We provide pre- and post-sales support by
e-mail, facsimile and toll-free telephone service. Upon ordering for the first
time, each customer receives a password-accessible personal account which
allows the customer to view current order status and prior order contents and
to select past orders for one-click reorders.
Order Fulfillment
We recently moved our order fulfillment center to a 25,000 square-foot
facility in Springfield, Massachusetts. This fulfillment center operates five
days per week. All product receiving, warehousing and pick, pack and ship
operations are housed in this facility. We currently stock approximately 10,000
products, including approximately 375 private label products, and have plans to
increase the number of items in-stock over time. All items that are in-stock
are noted as being "in-stock" on our Web site and are available for same day
shipment if the order is received prior to 3:00 p.m. EST. Orders for products
not in our warehouse are usually available for shipment within 24 to 72 hours,
and these items are ordered from suppliers at least once per day. Customers are
not charged for their orders until the ordered product is shipped. Orders are
shipped to locations worldwide by major carriers including the U.S. Postal
Service, UPS, Federal Express and DHL. Since the Springfield fulfillment center
is located across the street from a U.S. Postal Service Priority Mail
processing center, we intend to ship most orders by Priority Mail, thereby
reducing our current shipping costs.
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Order processing, inventory management, shipping and billing are primarily
handled by our proprietary system. We are in the process of converting from our
proprietary system to a system licensed from a third-party vendor, Yantra
Corporation, located in Acton, Massachusetts. When this conversion is
completed, the Yantra system, plus other third-party software modules, is
expected to handle order-to-fulfillment processing, including purchase order,
receiving, inventory management, shipping and billing and are expected to be
fully integrated with our front end, or the portion of our Web site technology
that handles user interface, product search, ordering, order tracking and
customer communications.
Technology and Systems
We have implemented a broad array of Web site management, search engine,
customer support, order-processing and order fulfillment systems using a
combination of commercially available, licensed technologies and selected
proprietary technologies. The front end of our Web site is built on industry
standard technologies, including Compaq multiprocessor servers, the Microsoft
Windows NT operating system, Microsoft Internet Information Server and a robust
Oracle database. These technologies are integrated using a variety of
proprietary computer programs, the majority of which are written in HTML,
Javascript and Microsoft Active Server Pages. These programs handle user
interface, product search, ordering, order tracking and customer
communications.
The current Web site front-end can be scaled to handle increases in traffic
and usage. Further, in response to capacity concerns and site development
needs, we recently increased from one to four the number of servers that run
our Web site and are in the process of configuring these servers in a manner to
handle additional traffic to our site. We intend to continue to invest in
technologies that will enable us to handle growth in traffic and advancements
in site infrastructure. In the near future, we plan to implement several new
systems, including tools for providing enhanced personalization of the front
end in response to consumer demographics and shopping preferences.
The continued, uninterrupted operation of our Web site and transaction-
processing systems is essential to our business, and we employ a group of
systems administrators to monitor and manage our Web site, network operations
and transaction-processing systems to ensure their continued operation and
reliability. In addition, the system includes redundant hardware on critical
components and can survive a variety of failures with minimal downtime.
We subcontract the hosting of our servers to NaviSite, Inc., an Internet data
center specialist. NaviSite provides Internet connections to multiple Internet
access points, a secure physical environment, climate control, redundant power
and 24-hour-a-day, 7-day-a-week monitoring services. NaviSite currently hosts
several of our servers in its Andover, Massachusetts data center. NaviSite has
adequate capacity for expansion in its Massachusetts facility to support our
growth. NaviSite currently provides us with a dedicated 100 Megabit per second
connection to the Internet for each of our four servers, which can be upgraded
to 400 Megabit per second or beyond. NaviSite has multiple connections to the
Internet through separate connections to various Internet service providers,
and these connections can be expanded as necessary to handle the traffic and
demands of our site. We plan to expand the hosting of our services into
additional facilities to provide additional support for our site in the event
of a disaster at one facility.
Competition
The electronic commerce industry is new, rapidly evolving and intensely
competitive, and we expect competition to intensify in the future. Barriers to
entry are minimal and current and new competitors can launch sites at a
relatively low cost. In addition, the vitamins, supplements, minerals and
natural and healthy living products market is very competitive and highly
fragmented, with no clear dominant leader and increasing public and commercial
attention.
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We believe that the principal competitive factors in our market are:
. brand recognition and trust-worthiness;
. ability to attract and retain customers;
. breadth of product selection;
. product pricing;
. availability of educational and authoritative information; and
. quality and responsiveness of customer service.
We believe that we compete favorably on these factors. However, we will have no
control over how successful our competitors are in addressing these factors. In
addition, with little difficulty, our online competitors can duplicate many of
the products, services or content offered on our site.
Our competitors can be divided into several groups including:
. traditional vitamins, supplements, minerals and natural and healthy
living products retailers, including General Nutrition Centers and
Vitamin Shoppe;
. the online retail initiatives of several traditional vitamins,
supplements, minerals and natural and healthy living products retailers,
including VitaminShoppe.com and Vitamins.com;
. online retailers of pharmaceutical and other health-related products
that also carry vitamins, supplements, minerals and natural and healthy
living products, including Drugstore.com, PlanetRx.com, More.com,
SelfCare and CVS.com;
. independent online retailers specializing in vitamins, supplements,
minerals and natural and healthy living, including HealthShop.com,
eNutrition, allherb.com, vitamins.net, HealthQuick and Vitanet;
. mail-order and catalog retailers of vitamins, supplements, minerals and
natural and healthy living products, including NBTY, Amrion, Rexall
Sundown and Vitamin Shoppe, some of which have already developed online
retail outlets; and
. direct sales organizations, retail drugstore chains, health and natural
food store merchants, mass market retail chains and various
manufacturers of natural products.
Many of our current and potential competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we have.
Additionally, industry consolidation may increase competition. Recently,
Drugstore.com announced the formation of a strategic relationship with Rite Aid
and General Nutrition Centers. In addition, an online retailer may be acquired
by, receive investments from, or enter into other commercial relationships
with, larger, well-established and well-financed companies as use of the
Internet and other electronic services increases. Competitors have and may
continue to adopt aggressive pricing or inventory availability policies and
devote substantially more resources to Web site and systems development than we
do. Increased competition may result in reduced operating margins, loss of
market share and a diminished brand franchise.
Regulatory Environment
Government regulation of our products. The manufacturing, processing,
formulating, packaging, labeling and advertising of the products we sell are or
may be subject to regulation by one or more federal agencies,
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including the FDA, the FTC, the United States Department of Agriculture and the
Environmental Protection Agency. These activities also may be regulated by
various agencies of the states, localities and foreign countries in which
consumers reside.
The FDA, in particular, regulates the formulation, manufacture, labeling and
distribution of foods, including dietary supplements, cosmetics and over-the-
counter or homeopathic drugs. Under the Federal Food, Drug, and Cosmetic Act,
the FDA may undertake enforcement actions against companies marketing
unapproved drugs, or "adulterated" or "misbranded" products. The remedies
available to the FDA include: criminal prosecution; an injunction to stop the
sale of a company's products; seizure of products; adverse publicity; and
"voluntary" recalls and labeling changes.
FDA regulations require that certain informational labeling be presented in a
prescribed manner on all foods, drugs, dietary supplements and cosmetics.
Specifically, the Food, Drug, and Cosmetic Act requires that food, including
dietary supplements, drugs and cosmetics, not be "misbranded." A product may be
deemed an unapproved drug and "misbranded" if it bears improper claims or
improper labeling. The FDA has indicated that promotional statements made about
dietary supplements on a company's Web site may constitute "labeling" for
purposes of compliance with the provisions of the Food, Drug, and Cosmetic Act.
A manufacturer or distributor of dietary supplements must notify the FDA when
it markets a product with labeling claims that the product has an effect on the
structure or function of the body. Noncompliance with the Food, Drug, and
Cosmetic Act, and recently enacted amendments to that Act discussed below,
could result in enforcement action by the FDA.
The Food, Drug, and Cosmetic Act has been amended several times with respect
to dietary supplements, most recently by the Nutrition Labeling and Education
Act of 1990 and the Dietary Supplement Health and Education Act of 1994. The
Dietary Supplement Health and Education Act created a new statutory framework
governing the definition, regulation and labeling of dietary supplements. With
respect to definition, the Dietary Supplement Health and Education Act created
a new class of dietary supplements, consisting of vitamins, minerals, herbs,
amino acids and other dietary substances for human use to supplement the diet,
as well as concentrates, metabolites, extracts or combinations of such dietary
ingredients. Generally, under the Dietary Supplement Health and Education Act,
dietary ingredients that were on the market before October 15, 1994 may be sold
without FDA pre-approval and without notifying the FDA. In contrast, a new
dietary ingredient, i.e., one not on the market before October 15, 1994,
requires proof that it has been used as an article of food without being
chemically altered or evidence of a history of use or other evidence of safety
establishing that it is reasonably expected to be safe. Retailers, in addition
to dietary supplement manufacturers, are responsible for ensuring that the
products they market for sale comply with these regulations. Noncompliance
could result in enforcement action by the FDA, an injunction prohibiting the
sale of products deemed to be noncompliant, the seizure of such products and
criminal prosecution.
With respect to labeling, the Dietary Supplement Health and Education Act
amends, for dietary supplements, the Nutrition Labeling and Education Act by
providing that "statements of nutritional support," also referred to as
"structure/function claims," may be used in dietary supplement labeling without
FDA pre-approval, provided certain requirements are met. These statements may
describe how particular dietary ingredients affect the structure or function of
the body, or the mechanism of action by which a dietary ingredient may affect
body structure or function, but may not state a drug claim, i.e., a claim that
a dietary supplement will diagnose, mitigate, treat, cure or prevent a disease.
A company making a "statement of nutritional support" must possess
substantiating evidence for the statement, disclose on the label that the FDA
has not reviewed the statement and that the product is not intended for use for
a disease and notify the FDA of the statement within 30 days after its initial
use. We cannot assure you that the statements of nutritional support we include
on our Web site, and on the labels or labeling of the products we sell, will
not be determined by the FDA to be drug claims rather than acceptable
"statements of nutritional support." Such a determination could render the
product that is the subject of the statement an unapproved drug or a
"misbranded" product, potentially subjecting us to enforcement action by the
FDA, and could require removal of the objectionable "drug claim," interfering
with our continued marketing of that product.
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In addition, the Dietary Supplement Health and Education Act allows the
dissemination of "third party literature" in connection with the sale of
dietary supplements to consumers at retail if the publication meets statutory
requirements. Under the Dietary Supplement Health and Education Act, "third
party literature" may be distributed if, among other things, it is not false or
misleading, no particular manufacturer or brand of dietary supplement is
promoted, a balanced view of available scientific information on the subject
matter is presented and there is physical separation from dietary supplements
in stores. The extent to which this provision may be used by online retailers
is not yet clear, and we cannot assure you that all pieces of "third party
literature" that may be disseminated in connection with the products we offer
for sale will be determined by the FDA to satisfy each of these requirements.
Any such failure could render the involved product an unapproved drug or a
"misbranded" product, potentially subjecting us to enforcement action by the
FDA, and could require the removal of the noncompliant literature from our Web
site, interfering with our continued marketing of that product.
Given the fact that the Dietary Supplement Health and Education Act was
enacted only five years ago, the FDA's policy and enforcement positions on
certain aspects of the new law are still evolving. Moreover, ongoing and future
litigation between dietary supplement companies and the FDA will likely further
refine the legal interpretations of the Dietary Supplement Health and Education
Act. As a result, the regulatory status of certain types of dietary supplement
products, as well as the nature and extent of permissible claims will remain
unclear for the foreseeable future. Two areas in particular that pose potential
regulatory risk are the limits on claims implying some benefit or relationship
with a disease or related condition and the application of the physical
separation requirement for "third party literature" as applied to Internet
sales.
The FDA currently proposes to regulate the sale of non-prescription products
containing ephedra, a natural product that contains a small percentage of the
ephedrine alkaloids that are used in some prescription and over-the-counter
stimulants and antihistimines. Less than 1% of our 1998 revenues were derived
from products that contain ephedra. We do not believe that a complete loss of
sales of these products or further restrictions in jurisdictions in which these
products may be sold would materially impair our operating results or financial
condition.
In addition to the regulatory scheme under the Food, Drug and Cosmetic Act,
the advertising and promotion of dietary supplements, foods, over-the-counter
drugs and cosmetics is subject to scrutiny by the FTC. The Federal Trade
Commission Act prohibits "unfair or deceptive" advertising or marketing
practices, and the FTC has pursued numerous food and dietary supplement
manufacturers and retailers for deceptive advertising or failure to
substantiate promotional claims, including, in many instances, claims made via
the Internet. The FTC has the power to seek administrative or judicial relief
prohibiting a wide variety of claims, to enjoin future advertising, to seek
redress or restitution payments and to seek a consent order and seek monetary
penalties for the violation of a consent order. In general, existing laws and
regulations apply fully to transactions and other activity on the Internet. The
FTC is in the process of reviewing its policies regarding the applicability of
its rules and its consumer protection guides to the Internet and other
electronic media. The FTC has already undertaken a new monitoring and
enforcement initiative, "Operation Cure-All," targeting allegedly bogus health
claims for products and treatments offered for sale on the Internet.
Many states impose their own labeling or safety requirements that differ from
or add to existing federal requirements. For example, the State of California
and the National Resources Defense Council filed lawsuits against a large
number of manufacturers of dietary supplements containing calcium, claiming
that naturally-occurring lead levels in these supplements exceed acceptable
levels under California law. Although this lawsuit has since been settled by
the parties involved, we cannot assure you that we will not be the subject of
future claims asserted by the State of California or private parties or that
any such claim might not result in significant additional expenses. Also, we
cannot assure you that other states will not enact legislation similar to that
enacted by the State of California or that such legislation will not extend to
any of the other products that we offer for sale.
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In addition, states enforce their own advertising or unfair and deceptive
trade practices statutes, and the vast majority authorize private rights of
action. For example, many state and federal agencies, including state attorneys
general, also have adopted Internet policies and have established dedicated
units or task forces for investigating possible violations of law on the
Internet.
State medical, pharmacy or dietician licensing bodies may also have
regulations or policies that could interfere with our ability to market our
products or services. International regulatory or customs authorities may also
limit our ability to market our products and services to consumers outside the
United States. Additional federal, state, local or international laws or
regulations may also affect our ability to market certain products or services,
such as "organic" foods, insect repellents, pet foods and other items.
We cannot predict the nature of any future laws, regulations, interpretations
or applications, nor can we determine what effect additional governmental
regulations or administrative orders, when and if promulgated, would have on
our business in the future. Although the regulation of dietary supplements is
less restrictive than that of drugs and food additives, we cannot assure you
that the current statutory scheme and regulations applicable to dietary
supplements will remain less restrictive. Further, we cannot assure you that,
under existing laws and regulations, or if more stringent statutes are enacted,
regulations are promulgated or enforcement policies are adopted, we are or will
be in compliance with these existing or new statutes, regulations or
enforcement policies without incurring material expenses or adjusting our
business strategy. Any laws, regulations, enforcement policies, interpretations
or applications applicable to our business could require the reformulation of
certain products to meet new standards, the recall or discontinuance of certain
products not capable of reformulation, additional record keeping, expanded
documentation of the properties of certain products, expanded or different
labeling or scientific substantiation.
Government regulation of the Internet. In general, existing laws and
regulations apply to transactions and other activity on the Internet; however,
the precise applicability of these laws and regulations to the Internet is
sometimes uncertain. The vast majority of such laws were adopted prior to the
advent of the Internet and, as a result, do not contemplate or address the
unique issues of the Internet or electronic commerce. Nevertheless, numerous
federal and state government agencies have already demonstrated significant
activity in promoting consumer protection and enforcing other regulatory and
disclosure statutes on the Internet. Additionally, due to the increasing use of
the Internet as a medium for commerce and communication, it is possible that
new laws and regulations may be enacted with respect to the Internet and
electronic commerce covering issues such as user privacy, freedom of
expression, advertising, pricing, content and quality of products and services,
taxation, intellectual property rights and information security. The adoption
of such laws or regulations and the applicability of existing laws and
regulations to the Internet may impair the growth of Internet use and result in
a decline in our sales.
We have adopted a privacy policy that sets forth our policies regarding our
use of personal user information and have posted this policy on our site. It is
possible, however, that federal or state legislation may be enacted governing
user privacy, use of personal user information and privacy policy requirements.
In fact, several states have recently proposed legislation that would limit the
uses of personal user information gathered online and require the establishment
of privacy policies. While we have implemented programs designed to enhance the
protection of the privacy of our users, including children, we cannot assure
you that such programs will conform with any regulations that may be
established. We may become subject to such an investigation, or the FTC's
regulatory and enforcement efforts may adversely affect the ability to collect
demographic and personal information from users, which could impair our ability
to provide highly targeted opportunities for advertisers and e-commerce
marketers.
It is also possible that "cookies" may become subject to laws limiting or
prohibiting their use. The term "cookies" refers to information keyed to a
specific server, file pathway or directory location that is stored on a user's
hard drive, possibly without the user's knowledge, which is used to track
demographic information and to target advertising. Although some companies
refuse to use cookies, we use them for a variety of reasons,
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including the collection of data derived from the user's Internet activity. We
use this data to better target our sales and marketing efforts to our current
and prospective customer base. Certain currently available Internet browsers
allow users to modify their browser settings to remove cookies at any time or
prevent cookies from being stored on their hard drives. In addition, a number
of Internet commentators, advocates and governmental bodies in the United
States and other countries have urged the passage of laws limiting or
abolishing the use of cookies. Limitations on or elimination of the use of
cookies could restrict the effectiveness of our targeting of advertisements,
which could prevent our business from growing or expose us to unanticipated
liabilities.
Planned features of our Web site include the retention of personal
information about our users which we obtain with their consent. We have a
stringent privacy policy covering this information. However, if third parties
were able to penetrate our network security and gain access to, or otherwise
misappropriate, our users' personal information, we could be subject to
liability. Such liability could include claims for misuses of personal
information, such as for unauthorized marketing purposes or unauthorized use of
credit cards. These claims could result in litigation, our involvement in
which, regardless of the outcome, could require us to expend significant
financial resources. Moreover, to the extent any of the data constitute or are
deemed to constitute patient health records, a breach of privacy could violate
federal law.
The European Union has adopted a directive that imposes restrictions on the
collection and use of personal data. Under the European Union directive,
European Union citizens are guaranteed certain rights, including the right of
access to their data, the right to know where the data originated, the right to
have inaccurate data rectified, the right to recourse in the event of unlawful
processing and the right to withhold permission to use their data for direct
marketing.
The European Union directive could, among other things, affect U.S. companies
that collect information over the Internet from individuals in European Union
member countries, and may impose restrictions that are more stringent than
current Internet privacy standards in the United States. In particular,
companies with offices located in European Union countries will not be allowed
to send personal information to countries that do not maintain adequate
standards of privacy. The European Union directive does not, however, define
what standards of privacy are adequate, and efforts by the U.S. government to
negotiate "safe harbors" principles defining how U.S. companies can comply with
the E.U. directive have not yet culminated in an agreement. As a result, we
cannot assure you that the European Union directive will not impair the
activities of entities such as our company that engage in data collection from
users in European Union member countries.
A number of legislative proposals have been made at the federal, state and
local level, and by foreign governments, that would impose additional taxes on
the sale of goods and services over the Internet, and certain states have taken
measures to tax Internet-related activities. Although Congress recently placed
a three-year moratorium on new state and local taxes on Internet access or on
discriminatory taxes on electronic commerce, existing state or local laws were
expressly excepted from this moratorium. Further, once this moratorium is
lifted, some type of federal and/or state taxes may be imposed upon Internet
commerce. Such legislation or other attempts at regulating commerce over the
Internet may substantially impair the growth of commerce on the Internet and,
as a result, adversely affect our opportunity to derive financial benefit from
such activities.
Intellectual Property
We regard the protection of our copyrights, service marks, trademarks, trade
dress, which is the appearance and packaging of our products, and trade secrets
as critical to our future success and rely on a combination of copyright,
trademark, service mark and trade secret laws, license agreements and
contractual restrictions to establish and protect our proprietary rights in our
site architecture and technology, products, content and services. We have
entered into confidentiality and invention assignment agreements with our
employees and contractors in order to limit disclosure of our proprietary
information and to protect our ownership interest in our site architecture and
technology. We cannot assure you that these contractual
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arrangements or the other steps taken by us to protect our intellectual
property will prove sufficient to prevent misappropriation of our technology or
deter independent third-party development of similar technologies. Moreover,
effective trademark, service mark, copyright and trade secret protection may
not be available in every country in which our services are made available
online.
We pursue the registration of our trademarks and service marks in the U.S.
and internationally; however, we cannot assure you that we will be successful
in obtaining the registration of our marks. We have applied for trademarks or
service marks on the following terms and images: "MotherNature.com" combined
with the MotherNature.com logo displayed on our Web site and other materials,
the MotherNature.com logo, "Go Ask Mother@" and "Your Healthy Living
Headquarters." "Natural products, healthy advice" is also one of our
trademarks. We also have rights to the domain names "MotherNature.com,"
"naturalmarkets.com," "naturalmarkets.net" and "naturalmarket.net."
We rely on content that we license from third parties, including our
Encyclopedia of Natural Health, which is licensed from Healthnotes, Inc.,
excerpts from books that are published by Rodale, and portions of our Web site
that have been developed under license agreements with third-party contractors.
We cannot assure you that these third-party content licenses and contractor
arrangements will continue to be available to us on commercially reasonable
terms. Moreover, the loss of such content licenses could require us to develop
similar content internally or could require us to obtain content that is of
lower quality or at a higher cost.
We have licensed in the past, and expect that we may license in the future,
certain of our proprietary rights, such as trademarks or copyrighted material,
to third parties. While we attempt to ensure that the quality of the
MotherNature.com brand is maintained by such licensees, we cannot assure you
that such licensees will not take actions that might result in a decrease in
the value of our proprietary rights.
Employees
As of September 30, 1999, we had 163 employees. We also hire a limited number
of independent contractors and temporary employees on a periodic basis. None of
our employees is represented by a labor union, and we consider our employee
relations to be good.
Properties
We currently lease approximately 10,000 square feet of office space in
Concord, Massachusetts, which houses our corporate headquarters. In connection
with relocating our customer support and fulfillment operations from
Pennsylvania to Massachusetts, we signed a lease in June 1999 for approximately
25,000 square feet of mixed-use space in Springfield, Massachusetts.
Additionally, we lease approximately 5,000 square feet of office space in
Acton, Massachusetts which we use for customer support and administrative
functions. Moreover, we have signed a letter of intent to lease approximately
48,000 square feet of office space in Maynard, Massachusetts. Our plan is to
consolidate our administrative and customer service operations currently in
Concord and Acton to this Maynard facility. We believe that these facilities
are adequate for our current operations and that additional leased space can be
obtained as needed on commercially reasonable terms.
Legal Proceedings
On June 30, 1999, a civil complaint was filed as Ross A. Love v.
MotherNature.com, Inc., Mother Nature's General Store, Inc. and Michael Barach,
individually in the Superior Court of Suffolk County, Massachusetts, Case No.
99-3087C. An Amended Complaint and Jury Demand was filed on August 19, 1999 as
Ross A. Love v. MotherNature.com, Inc. and Michael Barach, individually. In the
lawsuit, the plaintiff, a founder and former officer and director, alleges
causes of action including economic duress, breach of fiduciary duty and unfair
and deceptive acts and practices. Mr. Love, among other things, alleges that he
was compelled under economic
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duress to sign an agreement in connection with his termination of employment.
In addition, Mr. Love claims that we breached our fiduciary duty to him as a
stockholder by allegedly failing to provide him with certain information in
connection with our May 1999 preferred stock financing. Mr. Love seeks recovery
of actual damages which he alleges to be in excess of $100,000,000. We believe
that the claims made by Mr. Love are without merit and intend to defend this
lawsuit vigorously.
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MANAGEMENT
Executive Officers, Directors and Other Key Employees
The following sets forth the names, ages and positions of our executive
officers and directors as of September 30, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael I. Barach.......... 41 Chief Executive Officer, President and Director
Michael L. Bayer........... 34 Chief Financial Officer, Treasurer and Secretary
Donald J. Pettini.......... 36 Chief Technology Officer
Sharon L. Rice............. 51 Vice President, Brand Marketing
Jeffrey A. Steinberg....... 36 Chief Marketing Officer
Beverly J. Weich........... 34 Vice President, Sales and Site Development
Michael A. Greeley(1)...... 36 Director
Keith M. Kerman(2)......... 41 Director
Brent R. Knudsen(2)........ 43 Director
Jason G. Olim.............. 30 Director
Marc D. Poirier(1)......... 35 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Executive Officers and Directors
Michael I. Barach has served as our Chief Executive Officer and President and
a director since June 1998. From October 1990 until June 1998, Mr. Barach was
employed by Bessemer Venture Partners, where he specialized in the
telecommunications, retail and electronic commerce categories. Mr. Barach was a
Partner at Bessemer from February 1994 until June 1998. Prior to October 1990,
Mr. Barach held several executive management positions in various retail
organizations. Mr. Barach holds a B.A. from Amherst College, where he graduated
summa cum laude and Phi Beta Kappa. Mr. Barach received a J.D. from Harvard Law
School and a M.B.A. from Harvard Business School, where he graduated as a Baker
Scholar.
Michael L. Bayer has served as our Chief Financial Officer, Treasurer and
Secretary since December 1998, having started with us as our Vice President,
Finance in July 1998. From August 1995 until April 1998, he worked for Lifeline
Systems, a manufacturer and service provider of personal response systems,
first as Assistant Treasurer and then as Treasurer. Prior to that, Mr. Bayer
was Vice President, Strategic Planning for Specialty Loose Leaf, Inc., a custom
manufacturer of office supplies, from March 1995 until August 1995, where he
helped launch a leveraged buyout spin-off. From July 1992 until February 1995,
Mr. Bayer served in various financial management roles with Avery Dennison
Corporation, a multinational manufacturer of office supplies and adhesive
products. Mr. Bayer holds a B.S. in Finance and Investments with Distinction
from Babson College and a M.B.A. with Distinction from Cornell University,
where he was a Fried Fellow. Mr. Bayer is a Chartered Financial Analyst.
Donald J. Pettini has served as our Chief Technology Officer since June 1998.
From March 1996 until April 1998, he worked for Digital Equipment Corporation
as the initial member of the AltaVista Engineering Team, where he led several
projects as Project Director, including MilliCent. From 1985 until February
1996, Mr. Pettini held various engineering roles within Digital Equipment
Corporation, including as a member of the internal trouble-shooting team, and
he specialized in network design and encryption technology.
Sharon L. Rice has served as our Vice President, Brand Marketing since
September 1998. From September 1997 until September 1998, Ms. Rice was Director
of Marketing and Sales for financial cards at Polaroid Corporation. From
September 1995 to June 1997, Ms. Rice was Director of Marketing for
46
<PAGE>
BankBoston's credit card business. From June 1988 until August 1995, Ms. Rice
held a series of positions of increasing responsibility at Citibank, leaving as
Vice President of Credit Card Marketing. Ms. Rice received her B.A. from
American University and her M.A. in communication from Emerson College.
Jeffrey A. Steinberg has served as our Chief Marketing Officer since February
1999. Prior to that, Mr. Steinberg was Vice President of Marketing for Net
Grocer, Inc., an online retailer of grocery products, from February 1997
through December 1998. From September 1995 to February 1997, he was a manager
at A.T. Kearney, a management consulting firm, where he was involved with their
consumer products consulting practice and specialized in interactive and
database marketing. From October 1991 to September 1995, Mr. Steinberg worked
in the Deloitte & Touche Consulting Group's Retail and Direct Marketing
practice, first as a senior consultant and then as a manager. Since 1994, Mr.
Steinberg has authored three books on interactive marketing, relationship
marketing and database marketing on behalf of the Direct Marketing Association.
Mr. Steinberg holds a B.A. in Computer Science and Geography from Clark
University and a M.S. in Venture Capital Management from the MIT Sloan School
of Management.
Beverly J. Weich has served as our Vice President, Sales and Site Development
since June 1999 and was our Executive Producer from October 1998 through June
1999, having joined us in July 1998 as Director, Online Marketing. Prior to
that, she was a founder and Vice President, Marketing and Operations at E-
guide, an Internet venture, from February 1996 until June 1998. Ms. Weich first
developed natural product knowledge as General Manager of a full-facility
health club from April 1992 to October 1994, and then as General Manager of a
weight loss clinic from November 1994 to May 1995. Ms. Weich received her
B.B.A., cum laude, in Marketing from University of Massachusetts (Amherst) and
a M.B.A. in Marketing and Entrepreneurial Management from the University of
Southern California (Los Angeles).
Michael A. Greeley has served as a director since May 1999. Since June 1994,
Mr. Greeley has been Senior Vice President of GCC Investments, Inc., the
private equity investment group of GC Companies, Inc., which has as its primary
operating subsidiary General Cinema Theatres. Prior to this position, Mr.
Greeley was a Vice President from December 1992 until June 1994 at Wasserstein
Perella & Co., Inc., an international investment bank specializing in mergers
and acquisitions and corporate finance transactions. Mr. Greeley received a
B.A. with honors from Williams College and a M.B.A. from Harvard Business
School.
Keith M. Kerman, M.D. has served as a director since June 1998. Dr. Kerman is
a General Partner of Morgenthaler Venture Partners, a venture capital firm,
which he joined in April 1997. From February 1995 to March 1997, Dr. Kerman was
a partner at Marquette Venture Partners, a venture capital firm. Prior to 1995,
he was President of Corporate Health Administrators, Inc. and Vice President,
Medical Delivery at U.S. Healthcare, from June 1991 to February 1995. Dr.
Kerman is a board-certified internist. He received his medical and
undergraduate degrees from Brown University, where he graduated Phi Beta Kappa
and magna cum laude. He has a M.B.A. from The Wharton School of the University
of Pennsylvania, where he was a Robert Wood Johnson Foundation Scholar.
Jason G. Olim has served as a director since June 1998. Mr. Olim co-founded
CDNow, Inc., an online music retailer, in February 1994 and has been its Chief
Executive Officer since November 1997. Previously, Mr. Olim was employed in the
Professional Services group of Soft-Switch, Inc., a software concern, where he
designed and built software systems for routing mail and documents for domestic
and international clients. Mr. Olim holds a B.A. in Computer Science from Brown
University.
Brent R. Knudsen has served as a director since December 1998. Mr. Knudsen is
currently the Managing Director of North Castle Partners L.L.C., a private
equity firm. Prior to joining North Castle in 1998, Mr. Knudsen served from
November 1997 to July 1998 as President and Chief Executive Officer of GolfWeb,
Inc., a Web site catering to golf enthusiasts, prior to its acquisition by
SportsLine USA, Inc. From September 1996 to November 1997, Mr. Knudsen served
as President of the Sports and Mass Division of Bell Sports, Inc., a bicycle
and bicycle accessory company. From January 1994 to September 1996, Mr. Knudsen
served as a Division President of Specialized Bicycle Components, Inc. From
September 1985 through
47
<PAGE>
December 1994, Mr. Knudsen had marketing and business development
responsibilities at the Price Company which was later merged with Costco
Wholesale, Inc. Mr. Knudsen served as the original Vice President of Marketing
and Business Development for Price Club and as Managing Director of Price
Costco Industries. Mr. Knudsen holds degrees from the University of Utah, where
he received a B.A., with highest honors, in Economics and English, and
Georgetown Law School, where he received a J.D.
Marc D. Poirier has served as a director since September 1998. He has been a
General Partner of @Ventures III, L.P., a venture capital firm affiliated with
CMGI, Inc., since August 1998. Mr. Poirier joined CMGI in May 1996 at Planet
Direct, a CMGI subsidiary providing Web portals to consumers through Internet
service providers and other co-branding partners. At Planet Direct, Mr. Poirier
served as Director, Business Development, and then as Vice President of
Electronic Commerce. Mr. Poirier was employed by Ernst & Young LLP in the
Mergers & Acquisitions Group from June 1992 to May 1996 and in the
Entrepreneurial Services Group from September 1986 to August 1990. Mr. Poirier
is a Certified Public Accountant and he holds a B.S. in Business Administration
from Providence College and a M.B.A. from Harvard Business School.
Other Key Employees
Set forth below is the name and recent business experience of each of the key
members of our management team not described above.
Selena Anderson has served as our Director, Purchasing since January 1999.
From August 1996 to August 1998, Ms. Anderson was the Director of Nutrition and
Body Care for Nature's Heartland. From January 1996 to June 1996 she was the
East Coast Regional Sales Manager for Jason Cosmetics. From June 1995 to
December 1995, she was a Sales Representative for Matrix Marketing. From
January 1995 to June 1995 she was the Regional Merchandiser for BIN Sales &
Marketing. From March 1994 to October 1994, she was a Purchasing Assistant for
Wild Oats. From May 1993 through December 1993 she was the Northern California
Regional Sales Manager for Stonyfield Farm. From January 1991 to May 1993, she
was a Field Sales Representative for Sunbelt Sales & Marketing. From January
1985 to January 1991, Ms. Anderson was the founder and owner of Vegan Street,
Inc., one of the first mail-order companies in the US dedicated to cruelty-free
and environmentally safe products. Ms. Anderson holds a B.A. in Psychology from
the University of Maryland.
C. Brad Eisold has served as our Director, Merchandising since January 1999.
Prior to joining us, Mr. Eisold served as Director of Grocery, Frozen Foods,
Dairy, Bulk Foods and Beer/Wine departments at Nature's Heartland stores in the
Boston area from June 1996 to August 1998. From November 1994 through June
1996, Mr. Eisold worked with Harris Teeter Supermarkets, Inc., where he
developed and instituted a natural products program for the chain. From May
1994 until November 1994, Mr. Eisold served as Director, Purchasing at Wild
Oats Markets. From February 1991 through November 1993, Mr. Eisold, as Vice
President of Purchasing with Fresh Fields Markets, developed and directed the
programs for the grocery, frozen foods and dairy departments. Mr. Eisold holds
a B.A. in Psychology and Sociology from American International College and an
M.Ed. in Psychology and Counseling from Springfield College.
Craig N. Weatherby has served as our Director, Content since joining us in
June 1998. From June 1996 to April 1998, Mr. Weatherby researched and wrote The
Arthritis Bible, the lead title from Healing Arts Press for the Spring of 1999.
In February 1997, Mr. Weatherby served as Director of Marketing at Nature's
Heartland, Inc. From November 1992 to April 1998, Mr. Weatherby wrote feature
articles for leading consumer and trade magazines, including Natural Health and
Natural Pharmacy, and operated Write Stuff Marketing, a communications
consultancy producing newsletters and biomedical monographs for major natural
products companies, including Whole Foods Market, Cornucopia Natural Foods,
Wild Harvest/Star Markets and Madis Botanicals. From July 1987 to October 1992
he served as Marketing Manager for the Bread & Circus Whole Foods Supermarket
chain, where he produced a comprehensive educational publications program. Mr.
Weatherby holds a B.A. in History from Windham College.
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<PAGE>
Future Director
In addition to the directors mentioned above, we intend to appoint Placido
Corpora, the President of Rodale's book division, to our board of directors
after completion of this offering:
Placido Corpora has served as the President of the Book Division of Rodale
Inc. since 1990 and as the Managing Director of Rodale's Interactive Division
since August 1999. Previously, Mr. Corpora held various positions with Rodale
since joining the company in 1980. Mr. Corpora holds a B.A. in Accounting from
Moravian College.
Board Committees
The board of directors has established an audit committee and a compensation
committee. The audit committee reviews, acts on and reports to the board of
directors with respect to various auditing and accounting matters, including
the recommendations and performance of our independent auditors, the scope of
the annual audits, fees to be paid to the independent auditors, and our
internal accounting and financial control policies and procedures. The members
of the audit committee are presently Messrs. Poirier and Greeley.
The compensation committee has the power to create our executive compensation
policy and determines the salaries and benefits for our employees, consultants,
directors and other individuals compensated by us. The committee also
administers our stock option and stock purchase plans. The members of the
compensation committee are presently Messrs. Kerman and Knudsen.
Director Compensation
Directors are reimbursed for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors and for meetings of any committees
of the board of directors on which they serve. No employee will receive
separate compensation for services rendered as a director. Non-employee
directors are also eligible for participation in our 1999 Stock Plan. See the
description of that Plan under the section of this prospectus called
"Management -- Stock Plans." In addition, in July 1998, we granted Mr. Olim an
option to purchase 10,720 shares of our common stock with an exercise price of
$0.22 per share in consideration for his services on our board of directors. In
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," no compensation expense is reflected in the
accompanying statements of operations related to these options.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between the board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any interlocking relationship existed in the past.
49
<PAGE>
Executive Compensation
The following table sets forth all compensation awarded to, earned by or paid
to our Chief Executive Officer and to another individual who served as our
Chief Executive Officer during 1998 for services rendered in all capacities
during 1998. No other executive officer or employee had compensation in excess
of $100,000 during 1998. We may refer to these officers as our named executive
officers in other parts of this prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------- --------------------
Other Annual Number of Securities All Other
Name and Principal Position Salary Compensation Underlying Options Compensation
- --------------------------- ------- ------------ -------------------- ------------
<S> <C> <C> <C> <C>
Michael I. Barach, Chief
Executive Officer and
President(1)........... $37,840 -- 415,501 --
Ross A. Love, former
Chief Executive Officer
and President(2)....... $18,846 $3,800(3) 156,774(2) $41,123(4)
</TABLE>
- --------
(1) Mr. Barach assumed the offices of Chief Executive Officer and President in
June 1998.
(2) Mr. Love resigned as Chief Executive Officer and President in June 1998 and
resigned as an employee and director in August 1998. Unvested options to
purchase 141,112 shares automatically expired in connection with his
resignation of employment in August 1998.
(3) Includes $3,000 in relocation expenses.
(4) Represents severance payments in the amount of $26,923 and forgiveness of
indebtedness in the amount of $14,200 in connection with Mr. Love's
resignation of employment.
Employment Agreement
We have entered into an employment agreement with Michael Barach. Mr.
Barach's agreement provides that he shall serve as our Chief Executive Officer
and also requires us to nominate him for the board of directors at each annual
meeting. His employment agreement expires in September 2001, with provision for
annual one-year renewals. Mr. Barach's base salary is $250,000 per year,
subject to increase by the board of directors. Mr. Barach's employment
agreement provides him with severance benefits in the event we terminate him
other than for cause and in the event he terminates his employment for good
reason. The employment agreement also contains provisions that provide Mr.
Barach with a lump sum cash payment if his employment terminates within one
year following certain changes in control of MotherNature.com. Mr. Barach's
employment agreement also contains non-competition and non-solicitation
provisions.
Option Grants During the Year Ended December 31, 1998
The following table sets forth specified information regarding options
granted to each of the named executive officers during the year ended December
31, 1998. We have not granted any stock appreciation rights. The options were
granted under our 1998 Stock Plan. In general, options granted under the plan
vest over four years, with 25% of the option shares granted vesting on the one-
year anniversary of the grant date and the remainder vesting in 12 equal
quarterly installments, and expire on the tenth anniversary of the date of
grant, subject to earlier termination in certain situations related to
resignation or termination of employment. The percentage of total options
granted to employees in 1998 shown in the table below is based on options to
purchase an aggregate of 1,058,118 shares of common stock granted during the
year ended December 31, 1998. Potential realizable values are net of exercise
prices and before taxes, and are based on an assumed initial public offering
price of $12.00 per share and the assumption that our common stock appreciates
at the annual rate shown, compounded annually, from the date of grant until the
expiration of the option term. These
50
<PAGE>
numbers are calculated based on Securities and Exchange Commission requirements
and do not reflect our projection or estimate of future stock price growth. The
amounts shown in this table represent hypothetical gains that could be achieved
for the respective options if exercised at the end of the option term. Actual
gains, if any, on stock option exercises will depend on the future performance
of the common stock, the optionholders' continued employment through the option
period and the date on which the options are exercised.
With respect to Mr. Barach's options, options to purchase 50,159 shares are
currently exercisable as of September 30, 1999 and the balance of the options
continue to vest in different increments through October 1, 2002. With respect
to Mr. Love's options, the board of directors accelerated the vesting of
options to purchase 15,662 shares, and unvested options to purchase 141,112
shares automatically expired in connection with his resignation of employment
in August 1998. Since none of Mr. Love's options listed below were outstanding
as of September 30, 1999, the potential realizable values at assumed annual
rates of stock price appreciation are not included in the table below.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
--------------------- ------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees Price Per Expiration
Name Granted in 1998 Share Date 5% 10%
---- ---------- ---------- --------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael I. Barach....... 188,664 17.8% $0.22 6/10/08 $ 3,646,259 $ 5,830,644
Michael I. Barach....... 118,585 11.2% $0.22 6/15/08 2,291,861 3,664,859
Michael I. Barach....... 108,252 10.2% $0.75 12/22/08 2,034,784 3,288,145
Ross A. Love............ 34,169 3.2% $0.22 6/10/08 -- --
Ross A. Love............ 122,605 11.6% $0.22 6/15/08 -- --
</TABLE>
1998 Option Exercises and Year-End Option Values
The following table sets forth certain information concerning the number and
value of options exercised by each of the named executive officers as of
December 31, 1998 and the number and value of unexercised options held by each
of the named executive officers at December 31, 1998. The value of unexercised
in-the-money options represents the total gain which would be realized if all
in-the-money options held at December 31, 1998 were exercised, determined by
multiplying the number of shares underlying the options by the difference
between an assumed initial public offering price of $12.00 per share and the
per share option exercise price. An option is in-the-money if the fair market
value of the underlying shares exceeds the exercise price of the option.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options at Options at
December 31, 1998 December 31, 1998
------------------------- -------------------------
Number of
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael I. Barach....... -- -- 78,609 336,892 $926,014 $3,911,215
Ross A. Love............ 15,662 $184,499 -- -- -- --
</TABLE>
Stock Plans
1998 Stock Plan. Our board of directors and stockholders adopted the
MotherNature.com, Inc. 1998 Stock Plan in June 1998. The aggregate number of
shares of common stock which may be issued under the 1998 Stock Plan, as
amended, is 1,695,728. Under the 1998 Stock Plan, we are authorized to grant
incentive stock options and non-qualified stock options, as well as awards of
common stock and opportunities to make direct purchases of common stock to
employees, consultants, directors and officers. The 1998 Stock Plan is
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<PAGE>
administered by the compensation committee. The 1998 Stock Plan provides that
the compensation committee has the authority to select the participants and
determine the terms of the stock options, awards and purchase rights granted
under the 1998 Stock Plan. An incentive stock option is not transferable by the
recipient except by will or by the laws of descent and distribution. Non-
qualified stock options and other awards are transferable only to the extent
provided in the agreement relating to such option or award or in response to a
valid domestic relations order. Generally, no incentive stock options may be
exercised more than three months following termination of employment. However,
in the event that termination is due to death or disability, the stock option
is exercisable for a maximum of 180 days after such termination. As of
September 30, 1999, we had outstanding under the 1998 Stock Plan incentive
stock options to purchase 1,053,898 shares of common stock and non-qualified
stock options to purchase 313,110 shares of common stock.
1999 Stock Plan. Our 1999 Stock Plan was adopted by our board of directors
in July 1999 and approved by our stockholders in October 1999. The 1999 Stock
Plan provides for the grant of stock-based awards to employees, officers and
directors of, and consultants or advisors to, MotherNature.com and its
subsidiaries, including incentive stock options and non-qualified stock options
and other equity-based awards. Incentive stock options may be granted only to
our employees. A total of 368,485 shares of common stock may be issued upon the
exercise of options or other awards granted under the 1999 Stock Plan. The
maximum number of shares that may be granted to any employee under the 1999
Stock Plan shall not exceed 184,242 shares of common stock during any calendar
year.
The 1999 Stock Plan is administered by the board of directors and the
compensation committee. The 1999 Stock Plan provides that the board of
directors and the compensation committee have the authority to select the
persons to whom awards are granted and determine the terms of each award,
including the number of shares of common stock to be granted. Payment of the
exercise price of an award may be made in cash, shares of common stock, a
combination of cash or stock or by any other method approved by the board or
compensation committee, consistent with Section 422 of the Internal Revenue
Code and Rule 16b-3 under the Securities Exchange Act of 1934, as amended.
Unless otherwise permitted by us, awards are not assignable or transferable
except by will or the laws of descent and distribution.
The board of directors or the compensation committee may amend, modify or
terminate any award granted or made under the 1999 Stock Plan, so long as such
amendment, modification or termination would not materially and adversely
affect the participant. The board of directors or the compensation committee
may also accelerate or extend the date or dates on which all or any particular
option or options granted under the 1999 Stock Plan may be exercised. No
options or other equity-based awards have been granted to date under the 1999
Stock Plan.
1999 Employee Stock Purchase Plan. The 1999 Employee Stock Purchase Plan was
adopted by our board of directors in July 1999 and approved by the stockholders
in October 1999. The 1999 Employee Stock Purchase Plan provides for the
issuance of a maximum of 100,496 shares of common stock.
The 1999 Employee Stock Purchase Plan is administered by the board of
directors and the compensation committee. All of our employees whose customary
employment is for more than 20 hours per week and for more than five months in
any calendar year and who have completed more than 90 days of employment with
us on or before the first day of any six-month payment period are eligible to
participate in the 1999 Employee Stock Purchase Plan. Outside directors and
employees who would own 5% or more of the total combined voting power or value
of our stock immediately after the grant may not participate in the 1999
Employee Stock Purchase Plan. To participate in the 1999 Employee Stock
Purchase Plan, an employee must authorize us to deduct an amount not less than
one percent nor more than 10 percent of a participant's total cash compensation
from his or her pay during each six-month payment periods. The first payment
period will commence on a date to be determined by the board of directors and
end on December 31, 1999. Thereafter, the payment periods will
52
<PAGE>
commence on the first day of January and July and end on the last day of the
following June and December, respectively, of each year, but in no case shall
an employee be entitled to purchase more than 50 shares in any one payment
period. The exercise price for the option granted in each payment period is 85%
of the lesser of the average market price of the common stock on the first or
last business day of the payment period, in either event rounded up to the
nearest cent. If an employee is not a participant on the last day of the
payment period, such employee is not entitled to exercise his or her option,
and the amount of his or her accumulated payroll deductions will be refunded.
Options granted under the 1999 Employee Stock Purchase Plan may not be
transferred or assigned. An employee's rights under the 1999 Employee Stock
Purchase Plan terminate upon his or her voluntary withdrawal from the plan at
any time or upon termination of employment. No options have been granted to
date under the 1999 Employee Stock Purchase Plan.
53
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of September 30, 1999, and as adjusted to
reflect the sale of the shares of common stock offered in this prospectus, by:
. each named executive officer;
. each of our directors;
. each person known by us to be the beneficial owner of more than 5% of
our common stock; and
. all executive officers and directors as a group.
Unless otherwise noted below, the address of each beneficial owner listed on
the table is c/o MotherNature.com, Inc., One Concord Farms, 490 Virginia Road,
Concord, Massachusetts 01742, and each beneficial owner has sole voting and
investment power over the shares shown as beneficially owned except to the
extent authority is shared by spouses under applicable law and except as set
forth in the footnotes to the table.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Shares of common stock issuable by us to a
person or entity listed in the table pursuant to options or warrants that may
be exercised within 60 days after September 30, 1999 are deemed to be
beneficially owned and outstanding for purposes of calculating the number of
shares and the percentage beneficially owned by that person or entity. However,
these shares are not deemed to be beneficially owned and outstanding for
purposes of computing the percentage beneficially owned by any other person or
entity.
For purposes of calculating the percentage of common stock beneficially owned
by any person, the number of shares deemed outstanding before the offering
includes:
. shares of common stock outstanding as of September 30, 1999;
. shares of common stock issuable upon the conversion of convertible
preferred stock outstanding as of September 30, 1999; and
. shares of common stock issuable upon the exercise of options and
warrants which may be exercised by that person or entity within 60 days
of September 30, 1999.
For purposes of calculating the percentage beneficially owned by any person
or entity, the number of shares deemed outstanding after the offering includes:
. all shares deemed to be outstanding before the offering; and
. shares being sold in this offering.
54
<PAGE>
<TABLE>
<CAPTION>
Percentage of Common
Stock Outstanding
------------------------
Number of Shares Before After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------------------ ------------------ ---------- ----------
<S> <C> <C> <C>
Executive Officers and
Directors:
Michael I. Barach(1)............ 225,383 2.0% 1.5%
Ross A. Love.................... 198,364 1.8 1.3
Michael A. Greeley(2)........... 678,589 6.2 4.5
Keith M. Kerman(3).............. 1,245,319 11.3 8.3
Jason G. Olim(4)................ 14,826 * *
Brent R. Knudsen(5)............. -- -- --
Marc D. Poirier(6).............. 1,245,319 11.3 8.3
All executive officers and
directors as a group
(12 persons)(7)................ 3,723,664 33.4 24.4
Five Percent Stockholders:
CMG@Ventures II, LLC(8)......... 1,245,319 11.3 8.3
c/o CMGI, Inc.
100 Brickstone Square
Andover, MA 01810
Morgenthaler Venture Partners
IV, L.P(9)..................... 1,245,319 11.3 8.3
50 Public Square
Suite 2700
Cleveland, OH 44113
Bessemer Venture Entities(10)... 1,245,319 11.3 8.3
83 Walnut Street
Wellesley, MA 02481
Rodale Inc. .................... 974,044 8.9 6.5
33 East Minor Street
Emmaus, PA 18098
North Castle Entities(11)....... 750,559 6.8 5.0
60 Arch Street
Greenwich, CT 06830
Chestnut Hill Nature, LLC....... 678,589 6.2 4.5
c/o GCC Investments, Inc.
1300 Boylston Street
Chestnut Hill, MA 02467
Pilinvest S.A................... 678,589 6.2 4.5
c/o Group Arnault
102 Rue Waelhem
1030 Brussels
Belgium
Covestco-AtEura, LLC............ 678,589 6.2% 4.5%
c/o Barnard & Co.
590 Madison Avenue
37th Floor
New York, NY 10022
</TABLE>
- --------
* Less than 1%
(1) Includes 153,928 shares held by Mr. Barach. Also includes 8,645 shares
issuable upon exercise of a warrant held by Mr. Barach and 62,810 shares
deemed to be beneficially owned by Mr. Barach pursuant to options
exercisable within 60 days of September 30, 1999.
55
<PAGE>
(2) Includes 678,589 shares held by Chestnut Hill Nature LLC, a wholly-owned
subsidiary of GCC Investments, Inc. Mr. Greeley is a Senior Vice President
of GCC Investments, Inc. and may be deemed to share voting and investment
power with respect to all shares held by Chestnut Hill Nature LLC. Mr.
Greeley disclaims beneficial ownership of such shares.
(3) Includes 1,236,674 shares held by Morgenthaler Venture Partners IV, L.P.
Also includes 8,645 shares issuable upon exercise of a warrant held by
Morgenthaler Venture Partners IV, L.P. Mr. Kerman is a General Partner of
Morgenthaler Venture Partners IV, L.P. and may be deemed to share voting
and investment power with respect to all shares held by Morgenthaler
Venture Partners IV, L.P. Mr. Kerman disclaims beneficial ownership of such
shares.
(4) Includes 4,020 shares deemed to be beneficially owned by Mr. Olim pursuant
to options exercisable within 60 days of September 30, 1999.
(5) Does not include 712,423 shares held by North Castle Partners II, L.P.,
17,572 shares held by NCP Co-Investment Fund, L.P., and 20,564 shares held
by NCP-MNC, L.P. Mr. Knudsen is a limited partner of NCP GP II, L.P., which
is the General Partner of North Castle Partners II, L.P., and Mr. Knudsen
is a Managing Director of North Castle GP II, LLC, which serves as the
general partner of NCP GP II, L.P. as well as NCP-MNC, L.P. Mr. Knudsen is
also a Managing Director of NCP Co-Investment G. P., LLC, which is the
general partner of NCP Co-Investment Fund, L.P. Mr. Knudsen does not share
voting and investment power with respect to the shares held by North Castle
Partners II, L.P., NCP Co-Investment Fund, L.P. and NCP-MNC, L.P.
(6) Includes 1,236,674 shares held by CMG@Ventures II, LLC. Also includes
warrants for 8,645 shares issuable upon exercise of a warrant held by
CMG@Ventures II, LLC. Mr. Poirier is a General Partner of CMG@Ventures
Partners III, L.P. which is an affiliate of CMG@Ventures II, LLC. Mr.
Poirier may be deemed to share voting and investment power with respect to
all shares held by CMG@Ventures II, LLC. Mr. Poirier disclaims beneficial
ownership of such shares.
(7) Includes 137,340 shares subject to options exercisable within 60 days of
September 30, 1999 and 25,935 shares issuable upon exercise of warrants.
(8) Includes 1,236,674 shares held by CMG@Ventures II, LLC. Also includes 8,645
shares issuable upon exercise of a warrant held by CMG@Ventures II, LLC.
(9) Includes 1,236,674 shares held by Morgenthaler Venture Partners IV, L.P.
Also includes 8,645 shares issuable upon exercise of a warrant held by
Morgenthaler Venture Partners IV, L.P.
(10) Includes 693,266 shares held by Bessemer Venture Partners IV L.P., 424,831
shares held by Bessec Ventures IV L.P. and 118,577 shares held by Bessemer
Venture Investors L.P. Also includes 4,323 shares issuable upon exercise
of a warrant held by Bessemer Venture Partners IV L.P. and 4,322 shares
issuable upon exercise of a warrant held by Bessec Ventures IV L.P.
(11) Includes 712,423 shares held by North Castle Partners II, L.P., 17,572
shares held by North Castle Co-Investment Fund, L.P. and 20,564 shares
held by NCP-MNC, L.P.
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<PAGE>
CERTAIN TRANSACTIONS
We believe that all of the transactions set forth below were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us
and our officers, directors, principal stockholders and their affiliates, will
be approved by a majority of the board of directors, including a majority of
the independent and disinterested members of the board of directors, and will
be on terms no less favorable to us than those that could be obtained from
unaffiliated third parties.
Sales of Stock, Notes and Warrants
Convertible Note and Warrant Financing. In May 1998, we issued and sold
$400,000 of secured convertible promissory notes and warrants to purchase an
aggregate of 34,580 shares of our common stock at an exercise price of $2.31
per share to five accredited investors. Pursuant to their terms, the notes
converted into an aggregate of 1,290,323 shares of series A preferred stock
upon the closing of the series A convertible preferred stock financing
discussed below. Investors owning five percent or more of our shares and our
Chief Executive Officer (who is also President and a director) who participated
in this transaction include:
<TABLE>
<CAPTION>
Investor Promissory Note Warrant Shares
-------- --------------- --------------
<S> <C> <C>
CMG@Ventures II, LLC......................... $100,000 8,645
Morgenthaler Ventures IV, L.P................ $100,000 8,645
Bessemer Venture Entities.................... $100,000 8,645
Michael Barach............................... $100,000 8,645
</TABLE>
Marc Poirier, one of our directors, is a general partner of @Ventures III,
L.P., which is an affiliate of CMG@Ventures II, LLC. Keith Kerman, one of our
directors, is a general partner of Morgenthaler Venture Partners IV, L.P.
Bessemer Venture Partners IV L.P., Bessec Ventures IV L.P. and Bessemer Venture
Investors IV L.P. are affiliated entities, collectively own greater than 10% of
our shares and are collectively referred to in this prospectus as the Bessemer
Venture entities.
Series A Preferred Stock Financing. In June 1998, we issued and sold an
aggregate of 21,451,613 shares of series A preferred stock at a price per share
of $0.31 to seven accredited investors. In July 1998, we issued and sold an
additional 1,864,484 shares of series A preferred stock to nine accredited
investors. The series A shares will be converted into an aggregate of 3,124,232
shares of common stock upon the closing of this offering. We sold 80,645 shares
of series A preferred stock to Jason Olim, one of our directors, as part of
this financing. Investors owning five percent or more of our shares who
purchased shares of series A preferred stock and the number of shares each
purchased, including shares issued upon conversion of the promissory notes
discussed under the heading "Convertible Note and Warrant Financing" above,
include:
<TABLE>
<CAPTION>
Number of
Shares of
Number of Common Stock
Investor Series A Shares upon Conversion
-------- --------------- ---------------
<S> <C> <C>
CMG@Ventures II, LLC........................ 6,451,613 864,480
Morgenthaler Venture Partners IV, L.P....... 6,451,613 864,480
Bessemer Venture Entities................... 6,451,613 864,480
Michael Barach.............................. 483,871 64,836
</TABLE>
Series B-1 Preferred Stock Financing. In December 1998, we issued and sold
19,950,125 shares of series B-1 preferred stock at a price per share of $0.5213
to 13 accredited investors. In January 1999, we issued and sold an additional
3,069,250 shares of series B-1 preferred stock to one accredited investor. The
series B-1 shares will be converted into an aggregate of 3,084,474 shares of
common stock upon the closing of this offering. Brent Knudsen, one of our
directors, is a limited partner of NCP GP II, L.P., which is the General
Partner of North Castle Partners II, L.P., and Mr. Knudsen is a Managing
Director of North Castle GP II, LLC, which serves as the general partner of NCP
GP II, L.P., as well as NCP-MNC, L.P. Mr. Knudsen is also a Managing Director
of NCP Co-Investment G.P., LLC, which is the general partner of NCP Co-
Investment Fund, L.P. North Castle Partners II, L.P., North Castle Co-
Investment Fund, L.P. and NCP-MNC, L.P. are collectively referred to in this
prospectus as the North Castle entities. NCP-MNC, L.P. purchased 3,069,250
57
<PAGE>
shares of series B-1 preferred stock. Investors owning five percent or more of
our shares who purchased shares of series B-1 preferred stock and the number of
shares each purchased include:
<TABLE>
<CAPTION>
Number of
Shares of
Number of Series Common Stock
Investor B-1 Shares upon Conversion
-------- ---------------- ---------------
<S> <C> <C>
CMG@Ventures II, LLC....................... 2,397,852 321,299
Morgenthaler Venture Partners IV, L.P. .... 2,397,852 321,299
Bessemer Venture Entities.................. 2,397,852 321,299
North Castle Entities...................... 3,069,250 411,264
</TABLE>
Series C Preferred Stock Financing. In May 1999, we issued and sold
18,409,629 shares of series C preferred stock at a price per share of $2.2787
to 16 accredited investors. These shares will be converted into an aggregate of
2,846,686 shares of common stock upon the closing of this offering, after
giving effect to the amendment to our certificate of incorporation described
below under the heading "Changes in Preferred Stock Conversion Features." Mr.
Michael Greeley, one of our directors, is a Senior Vice President of GCC
Investments, Inc., which wholly-owns Chestnut Hill Nature, LLC. Chestnut Hill
Nature, LLC purchased 4,388,468 shares of series C preferred stock. Investors
owning five percent or more of our shares who purchased shares of series C
preferred stock and the number of shares purchased include:
<TABLE>
<CAPTION>
Number of Shares
of Common Stock
Investor Number of Series C Shares upon Conversion
-------- ------------------------- ----------------
<S> <C> <C>
CMG@Ventures II, LLC............. 329,136 50,895
Morgenthaler Venture Partners,
L.P. ........................... 329,136 50,895
Bessemer Venture Entities........ 329,136 50,895
North Castle Entities............ 2,194,234 339,295
Covestco-AtEura LLC.............. 4,388,468 678,589
Pilinvest S.A. .................. 4,388,468 678,589
Chestnut Hill Nature, LLC........ 4,388,468 678,589
</TABLE>
Registration Rights. In connection with the preferred stock financings, we
granted registration rights to the preferred stockholders. See "Description of
Securities - Registration Rights."
Changes in Preferred Stock Conversion Features
On July 30, 1999, we filed an amendment to our certificate of incorporation
increasing the number of shares of common stock into which each share of
series C preferred stock will automatically convert in connection with a public
offering of our equity securities from approximately 0.13 shares of common
stock to approximately 0.14 shares of common stock, subject to certain
conditions related to the offering. At the same time, holders of our series A
shares, series B-1 shares and series C shares agreed to automatic conversion of
their series A shares, series B-1 shares and series C shares, respectively,
into shares of our common stock effective upon the closing of this offering.
On October 18, 1999, our Board of Directors approved, subject to stockholder
approval, an amendment to our certificate of incorporation increasing the
number of shares of common stock into which each share of series C preferred
stock will automatically convert in connection with a public offering of our
equity securities from approximately 0.14 shares of common stock to
approximately 0.15 shares of common stock, subject to certain conditions
related to the offering. This amendment to our certificate of incorporation
also prevents any further adjustments to the number of shares of common stock
issuable upon conversion of the series C preferred stock.
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<PAGE>
Agreements with Affiliates of CMG@Ventures II, LLC
We have a Web site hosting agreement with NaviSite, Inc. and have an online
advertising agreement with Lycos, Inc. During fiscal 1998 and the nine months
ended September 30, 1999, we paid service fees to NaviSite of $22,643 and
$68,079, respectively, and advertising fees to Lycos of $318,325 and $214,365,
respectively. NaviSite is a majority owned subsidiary of CMGI, Inc. and
approximately 17% of Lycos is owned by CMGI and its affiliates. CMGI, through
its venture capital fund CMG@Ventures II, LLC, owns greater than five percent
of our outstanding common stock.
Employment Agreement
For a description of our employment agreement with Michael Barach, please see
"Management--Employment Agreement."
Certain Agreements
In connection with Ross Love's resignation of employment on August 7, 1998,
we entered into a termination agreement whereby we agreed to pay Mr. Love
salary continuation in the amount of $70,000 per year through May 31, 2000,
forgive $21,100 in indebtedness incurred by Mr. Love while he was an employee,
pay up to $3,000 of Mr. Love's relocation expenses and accelerate the vesting
of Mr. Love's incentive stock options to purchase 15,662 shares of our common
stock.
Relationship with Rodale
For a description of our relationship with Rodale, please see "Business--Our
Relationship with Rodale."
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<PAGE>
DESCRIPTION OF SECURITIES
The following description of our capital stock and certain provisions of our
restated certificate of incorporation and by-laws are summaries and are
qualified by reference to the restated certificate and the restated by-laws
that will become effective upon the closing of this offering. Copies of these
documents have been filed with the Securities and Exchange Commission as
exhibits to our registration statement, of which this prospectus forms a part.
The descriptions of the common stock and preferred stock reflect changes to our
capital structure that will occur upon the closing of this offering.
Upon the completion of this offering, our authorized capital stock will
consist of 93,300,000 shares of common stock, par value $.01 per share, and
1,000,000 shares of preferred stock, par value $.01 per share.
Common Stock
As of September 30, 1999, there were 10,974,370 shares of common stock
outstanding and held of record by 62 stockholders, assuming conversion of all
outstanding shares of preferred stock. In addition, we have reserved an
aggregate of 1,695,728 shares of common stock for issuance under our 1998 Stock
Plan, 368,485 shares of common stock for issuance under our 1999 Stock Plan,
100,496 shares of common stock for issuance under our 1999 Employee Stock
Purchase Plan and 159,938 shares of common stock for issuance upon the exercise
of outstanding common stock purchase warrants.
The holders of common stock are entitled to one vote for each share of common
stock held of record on our books for the election of directors and on all
matters submitted to a vote of stockholders. The holders of common stock are
entitled to receive ratably dividends, if any, when, as and if declared by the
board of directors out of assets legally available therefor, subject to any
preferential dividend rights of any outstanding preferred stock. Upon our
dissolution, liquidation or winding up, the holders of common stock are
entitled to receive ratably our net assets available after the payment of all
debts and other liabilities, subject to the preferential rights of any
outstanding preferred stock. Holders of the common stock have no preemptive,
subscription, redemption or conversion rights. The rights, preferences and
privileges of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock that we may designate and issue in the future. Upon the closing of this
offering, there will be no shares of preferred stock outstanding.
Preferred Stock
Upon the closing of this offering, the board of directors will be authorized,
without further vote or action by the stockholders, to issue from time to time
up to an aggregate of 1,000,000 shares of preferred stock in one or more series
and to fix or alter the designations, rights, preferences and privileges and
any qualifications, limitations or restrictions of the shares of each such
series of preferred stock, including the dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption including sinking fund
provisions, redemption price or prices, liquidation preferences and the number
of shares constituting any series or designations of such series, any or all of
which may be greater than the rights of common stock. The issuance of preferred
stock could adversely affect the voting power of holders of common stock and
the likelihood that such holders will receive dividend payments and payments
upon liquidation and could have the effect of delaying, deferring or preventing
a change in control. We have no present plans to issue any shares of preferred
stock.
Warrants
In April 1998, we issued warrants to purchase an aggregate of 40,199 shares
of our common stock at an exercise price of $0.07 per share, exercisable at any
time prior to April 29, 2003. These warrants include a cashless exercise
feature, and the holders are entitled to certain customary antidilution
protection, including
60
<PAGE>
adjustments to the number of shares of common stock issuable upon exercise of
the warrants in the event of a subdivision or combination of the common stock
or the payment of a stock dividend on our common stock.
In May 1998, we issued warrants to purchase an aggregate of 34,580 shares of
our common stock at an exercise price of $2.31 per share, exercisable at any
time prior to May 1, 2006. These warrants include a cashless exercise feature,
and the holders are entitled to certain customary antidilution protection,
including adjustments to the number of shares of common stock issuable upon
exercise of the warrants in the event of a subdivision or combination of our
common stock or payment of a stock dividend on our common stock. These warrants
were issued in connection with our convertible note and warrant financing. See
"Certain Transactions-- Sales of Stock, Notes and Warrants." The holders of the
warrants are entitled to registration rights pursuant to the registration
rights agreement with respect to the shares of common stock issuable upon
exercise of the warrants. These registration rights are the same as those
afforded the parties to the registration rights agreement. The registration
rights agreement and applicable registration rights are discussed below under
the heading "Registration Rights."
In connection with a subordinated loan and equipment lease financing in
December 1998, we issued warrants to purchase an aggregate of 66,359 shares of
common stock at an exercise price of $3.75 per share, exercisable at any time
prior to the earlier of December 4, 2005 or three years from the effective date
of our initial public offering. The warrants include a cashless exercise
feature, and the holders are entitled to certain customary antidilution
protection, including adjustments to the number of shares of common stock
issuable in the event of a merger or sale of assets, reclassification of
shares, subdivision or combination of our common stock or payment of a stock
dividend on our common stock. The holder of the warrants is entitled to
registration rights pursuant to the registration rights agreement with respect
to the shares of common stock issuable upon exercise of the warrants. These
registration rights are the same as those afforded the parties to the
registration rights agreement. The registration rights agreement and applicable
registration rights are discussed below under the heading "Registration
Rights."
In May 1999, we issued a warrant to purchase an aggregate of 18,376 shares of
our common stock at an exercise price per share of $20.41, exercisable at any
time prior to May 12, 2004. This warrant includes a cashless exercise feature,
and the holder is entitled to certain customary antidilution protection,
including adjustments to the number of shares of common stock issuable upon
exercise of the warrant in the event of a subdivision or combination of our
common stock or payment of a stock dividend on our common stock. Pursuant to
antidilution adjustments, an additional 6,320 shares of common stock will be
issuable under the warrant and the current exercise price of the warrant is
$16.38 per share, subject to certain conditions related to the offering. The
holder of the warrants is entitled to registration rights pursuant to the
registration rights agreement with respect to the shares of common stock
issuable upon exercise of the warrants. These registration rights are the same
as those afforded the parties to the registration rights agreement. The
registration rights agreement and applicable registration rights are discussed
below under the heading "Registration Rights."
In June 1999, we issued a warrant to purchase an aggregate of up to 804
shares of our common stock at an exercise price per share of $18.65,
exercisable at any time prior to June 22, 2002. This warrant includes a
cashless exercise feature, and the holder is entitled to certain customary
antidilution protection, including adjustments to the number of shares of
common stock issuable upon exercise of the warrant in the event of a
subdivision or combination of our common stock or payment of a stock dividend
on our common stock.
Convertible Note
Pursuant to the loan agreement with our subordinated lender, we granted the
lender the right to convert, on one occasion, up to 30% of the original
aggregate principal amount of all advances under the loan agreement into shares
of our common stock at an exercise price of $3.73 per share. This conversion
option expires on December 4, 1999. The maximum amount that we are entitled to
borrow under the loan agreement is $3,000,000. As of the date of this
prospectus, we have not borrowed any money under the loan agreement. The lender
is entitled to registration rights pursuant to the registration rights
agreement with respect to the shares of common stock issuable upon exercise of
the conversion option. The registration rights agreement and applicable
registration rights are discussed below under the heading "Registration
Rights."
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<PAGE>
Registration Rights
Pursuant to the terms of a registration rights agreement, after this
offering, the holders of approximately 10,316,892 shares of common stock,
warrants to acquire 125,635 shares of common stock and options to acquire
326,409 shares of common stock will be entitled to certain rights with respect
to the registration of such shares under the Securities Act. Under the terms of
the registration rights agreement, if we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, the holders
are entitled to notice of such registration and are entitled to include shares
of their common stock therein. Additionally, the holders are entitled to
certain demand registration rights pursuant to which they may require us to
file a registration statement under the Securities Act at our expense with
respect to their shares of common stock, and we are required to use our best
efforts to effect that registration. We are not required to effect more than
two of these demand registrations. In addition, the holders are entitled to
demand registration rights pursuant to which they may require us to file a
registration statement under the Securities Act on Form S-3 at our expense with
respect to their shares of common stock, and we are required to use our best
efforts to effect that registration. We are not required to effect more than
one of these Form S-3 demand registrations in any twelve-month period. All of
these registration rights are subject to conditions and limitations, including
the right of the underwriters of an offering to limit the number of shares
included in such registration and our right not to effect a requested
registration within six months following any offering of our securities,
including this offering. In addition, our obligation to register shares of
common stock terminates immediately with respect to a security holder holding
2% or less of our outstanding shares, provided that all shares held by the
holder may be publicly sold within a three-month period pursuant to the
Securities Act. In any event, all registration rights terminate four years from
the date of this prospectus.
Anti-Takeover Effects of Provisions of Delaware Law and Our Certificate of
Incorporation and By-laws
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203 of Delaware law
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the board of directors or unless the business combination is
approved in a prescribed manner. A "business combination" is defined as a
merger, asset sale or other transaction resulting in a financial benefit to the
interested stockholder. Subject to various exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within the past three years did own, 15% or more of a corporation's voting
stock. This statute could prohibit or delay the accomplishment of mergers or
other takeover or change in control attempts with respect to us and,
accordingly, may discourage attempts to acquire us.
In addition, some provisions of the restated certificate and restated by-laws
may be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might deem to be in his or
her best interest. The existence of these provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock.
These provisions include:
Stockholder Action; Special Meeting of Stockholders. The restated certificate
of incorporation provides that stockholders may not take action by written
consent, but only at a duly called annual or special meeting of stockholders.
The restated certificate of incorporation further provides that special
meetings of our stockholders may be called only by the chairman of the board of
directors, and in no event may the stockholders call a special meeting. Thus,
without approval by the board of directors or chairman, stockholders may take
no action between meetings.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The restated by-laws provide that a stockholder seeking to bring
business before an annual meeting of stockholders, or to nominate candidates
for election as directors at an annual meeting of stockholders, must provide
timely notice of this
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<PAGE>
intention in writing. To be timely, a stockholder's notice must be delivered to
or mailed and received at our principal executive offices not less than 120
days prior to the first anniversary of the date of our notice of annual meeting
provided with respect to the previous year's annual meeting of stockholders.
However, if no annual meeting of stockholders was held in the previous year or
the date of the annual meeting of stockholders has been changed to be more than
30 calendar days from the time contemplated at the time of the previous year's
proxy statement, then a proposal shall be received no later than the close of
business on the 10th day following the date on which notice of the date of the
meeting was mailed or a public announcement was made, whichever first occurs.
The restated by-laws also include a similar requirement for making nominations
at special meetings and specify requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from bringing
matters before an annual meeting of stockholders or from making nominations for
directors at an annual or special meeting of stockholders.
Authorized but Unissued Shares. The authorized but unissued shares of common
stock and preferred stock are available for future issuance without stockholder
approval, subject to certain limitations imposed by the Nasdaq National Market.
These additional shares may be utilized for a variety of corporate acquisitions
and employee benefit plans. The existence of authorized but unissued and
unreserved common stock and preferred stock could render more difficult or
discourage an attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.
Super-majority Voting. Delaware law provides generally 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 bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
require a greater percentage. We have provisions in our restated certificate of
incorporation and restated by-laws which require a super-majority vote of the
stockholders to amend, revise or repeal anti-takeover provisions.
Limitation of Liability and Indemnification Matters
Our restated certificate of incorporation provides that, to the extent
permitted by Delaware law, our directors shall not be personally liable to us
or our stockholders for monetary damages for any breach of fiduciary duty as a
director. Under Delaware law, the directors have a fiduciary duty to us that is
not eliminated by this provision of the certificate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
director's duty of loyalty to us, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or that involve
intentional misconduct or knowing violations of law, for action leading to
improper personal benefit to the director and for payment of dividends or
approval of stock repurchases or redemptions that are prohibited by Delaware
law. This provision also does not affect the directors' responsibilities under
any other laws, such as the federal securities laws.
Our restated certificate of incorporation further provides for the
indemnification of our directors and officers to the fullest extent permitted
by Section 145 of the Delaware corporate law, provided that this provision
shall not eliminate or limit the liability of a director:
. for any breach of the director's duty of loyalty to the corporation or
its stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. arising under Section 174 of the Delaware corporate law; or
. for any transaction from which the director derived an improper personal
benefit.
Transfer Agent and Registrar
Upon the closing of this offering, the transfer agent and registrar for the
common stock will be ChaseMellon Shareholder Services, LLC.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock, and we make no prediction as to the effect, if any, that market sales of
shares of common stock or the availability of shares of common stock for sale
will have on the market price of the common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of common stock in the public
market, or the perception that such sales could occur, could adversely affect
the market price of the common stock and could impair our future ability to
raise capital through the sale of equity securities.
Upon the closing of this offering, we will have an aggregate of 15,074,370
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. Of
the outstanding shares, all of the shares sold in this offering will be freely
tradable, except that any shares purchased by "affiliates" (as that term is
defined in Rule 144 under the Securities Act), may only be sold in compliance
with the limitations described below. The remaining 10,974,370 shares of common
stock will be deemed "restricted securities" as defined in Rule 144. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144, including Rule
144(k), or Rule 701 promulgated under the Securities Act, which rules are
summarized below. Giving effect to the lock-up agreements described below and
the provisions of Rule 144, including Rule 144(k), and Rule 701, shares will be
available for sale in the public market as follows:
<TABLE>
<CAPTION>
Number
of Shares Date
--------- ----
<C> <S>
181,767 Immediately after the date of this prospectus
249,423 At various times after 90 days from the date of this
prospectus (Rules 144 and 701)
10,543,180 At various times after 180 days from the date of
this prospectus (subject, in some cases, to volume limitations)
</TABLE>
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate of ours,
who has beneficially owned shares for at least one year is entitled to sell,
within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of 1% of the
then outstanding shares of common stock, approximately shares immediately
after this offering, or the average weekly trading volume in the common stock
during the four calendar weeks preceding the date on which notice of such sale
is filed, subject to restrictions. In addition, a person who is not deemed to
have been an affiliate at any time during the 90 days preceding a sale and who
has beneficially owned the shares proposed to be sold for at least two years
would be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares were acquired from an
affiliate of ours, such person's holding period for the purpose of effecting a
sale under Rule 144 commences on the date of transfer from the affiliate.
Our directors and officers and stockholders holding an aggregate of
10,536,480 shares in the aggregate have agreed that they will not offer, sell
or agree to sell, directly or indirectly, or otherwise dispose of any shares of
common stock without the prior written consent of Bear, Stearns & Co. Inc. for
a period of 180 days from the date of this prospectus.
Any of our employees or consultants who purchased his or her shares pursuant
to a written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. As of September 30, 1999, the holders of options exercisable for
approximately 132,298 shares of common stock will be eligible to sell their
shares on the expiration of the 180-day lockup period or subject in some cases
to vesting of such options. In addition, the holders of warrants exercisable
for approximately 159,938 shares of common stock will be eligible to sell their
shares pursuant to Rule 144 at various times beginning 90 days after the date
of this prospectus.
64
<PAGE>
We intend to file one or more registration statements on Form S-8 under the
Securities Act to register all shares of common stock subject to outstanding
stock options and common stock issued or issuable under our stock plans. We
expect to file the registration statement covering shares offered pursuant to
the 1998 Stock Plan, the 1999 Stock Plan and the 1999 Employee Stock Purchase
Plan within 180 days after the date of this prospectus, permitting the resale
of such shares by nonaffiliates in the public market without restriction under
the Securities Act.
We have agreed not to sell or otherwise dispose of any shares of common stock
during the 180-day period following the date of the prospectus, except that we
may issue, and grant options to purchase, shares of common stock under the 1998
Stock Plan, the 1999 Stock Plan and the 1999 Employee Stock Purchase Plan. In
addition, we may issue shares of common stock in connection with any
acquisition of, or strategic relationship with, another company if the terms of
issuance provide that such common stock shall not be resold prior to the
expiration of the 180-day period referenced in the preceding sentence.
Following this offering, holders of 10,316,892 shares of outstanding common
stock will have demand registration rights with respect to their shares of
common stock, subject to the 180-day lock-up arrangement described above, to
require us to register their shares in any future registration of our
securities. See "Description of Securities -- Registration Rights."
65
<PAGE>
UNDERWRITING
Underwriting Agreement
Subject to the terms and conditions set forth in an agreement among the
underwriters and us, each of the underwriters named below, through their
representatives Bear, Stearns & Co. Inc., Hambrecht & Quist LLC and Wit Capital
Corporation, has severally agreed to purchase from us the aggregate number of
shares of our common stock set forth opposite its name below:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc...........................................
Hambrecht & Quist LLC.............................................
Wit Capital Corporation...........................................
---------
Total........................................................... 4,100,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of various legal matters by their counsel
and to various other conditions, including delivery of legal opinions by our
counsel, the delivery of a letter by our independent auditors and the accuracy
of the representations and warranties made by us in the underwriting agreement.
Under the underwriting agreement, the underwriters are obliged to purchase and
pay for all of the above shares of our common stock if any are purchased.
Public Offering Price
The underwriters propose to offer the shares of our common stock directly to
the public at the offering price set forth on the cover page of this prospectus
and at that price less a concession not in excess of $ per share of common
stock to other dealers who are members of the National Association of
Securities Dealers, Inc. The underwriters may allow, and those dealers may
reallow, concessions not in excess of $ per share of common stock to certain
other dealers. After this offering, the offering price, concessions and other
selling terms may be changed by the underwriters. Our common stock is offered
subject to receipt and acceptance by the underwriters and subject to other
conditions, including the right to reject orders in whole or in part. The
underwriters have informed us that the underwriters do not expect to confirm
sales of common stock to any accounts over which they exercise discretionary
authority.
The following table summarizes the per share and total public offering price
of the shares of common stock in the offering, the underwriting compensation to
be paid to the underwriters by us and the proceeds of the offering, before
expenses, to us. The information presented assumes either no exercise or full
exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
Total
-----------------------
Without With
Over- Over-
Per Share allotment allotment
--------- ----------- -----------
<S> <C> <C> <C>
Public offering price.................... $12.00 $49,200,000 $56,580,000
Underwriting discounts and commissions
payable by us........................... 0.84 3,444,000 3,960,600
------ ----------- -----------
Proceeds, before expenses, to us......... $11.16 $45,756,000 $52,619,400
====== =========== ===========
</TABLE>
The underwriting discount and commission per share is equal to the public
offering price per share of our common stock less the amount paid by the
underwriters to us per share of common stock.
66
<PAGE>
We estimate total expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will
be approximately $750,000.
Over-Allotment Option to Purchase Additional Shares
We have granted a 30-day over-allotment option to the underwriters to
purchase up to an aggregate of 615,000 additional shares of our common stock
exercisable at the offering price less the underwriting discounts and
commissions, each as set forth on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, then each of the
underwriters will be obligated to purchase additional shares of common stock in
proportion to their respective purchase commitments as shown in the table set
forth above, subject to various conditions.
Indemnification and Contribution
The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the
Securities Act or will contribute to payments that the underwriters may be
required to make in respect of those liabilities.
Lock-Up Agreements
Our directors and officers and stockholders holding 10,536,480 shares have
agreed that they will not offer, sell or agree to sell, directly or indirectly,
or otherwise dispose of any shares of common stock in the public market without
the prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days
from the date of this prospectus.
In addition, we have agreed that for a period of 180 days from the date of
this prospectus, we will not, without the prior written consent of Bear,
Stearns & Co. Inc, offer, sell or otherwise dispose of any shares of common
stock, except that we may issue, and grant options to purchase, shares of
common stock under the 1998 Stock Plan, the 1999 Stock Plan and the 1999
Employee Stock Purchase Plan. In addition, we may issue shares of common stock
in connection with any acquisition of, or strategic relationship with, another
company if the terms of such issuance provide that such common stock shall not
be resold prior to the expiration of the 180-day period referenced in the
preceding sentence.
Nasdaq National Market Quotation
Prior to this offering, there has been no public market for our common stock.
Consequently, the initial offering price for the common stock will be
determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in those negotiations, the
primary factors will be our results of operations in recent periods, estimates
of our prospects and the industry in which we compete, an assessment of our
management, the general state of the securities markets at the time of this
offering and the prices of similar securities of generally comparable
companies. We have applied for approval for the quotation of our common stock
on the Nasdaq National Market, under the symbol "MTHR." We cannot assure you,
however, that an active or orderly trading market will develop for the common
stock or that the common stock will trade in the public market subsequent to
this offering at or above the initial offering price.
Stabilization, Syndicate Short Position and Penalty Bids
In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock during and after this offering.
Specifically, the underwriters may over-allot or otherwise create a short
position in the common stock for their own account by selling more shares of
common stock than we have actually sold to them. The underwriters
67
<PAGE>
may elect to cover any such short position by purchasing shares of common stock
in the open market and may impose penalty bids, under which selling concessions
allowed to syndicate members or other broker-dealers participating in this
offering are reclaimed if shares of common stock previously distributed in this
offering are repurchased in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price at a level above that which might otherwise prevail in the open
market. The imposition of a penalty bid may also affect the price of the common
stock to the extent that it discourages resales thereof. No representation is
made as to the magnitude or effect of any such stabilization or other
transactions. Such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
Reserved Share Program
At our request, the underwriters have reserved for sale at the initial public
offering price up to 307,500 shares of common stock to be sold in this offering
for sale to our directors, officers, employees, business associates, vendors
and related persons. Purchases of reserved shares are to be made through an
account at Bear, Stearns & Co. Inc. in accordance with Bear, Stearns & Co.
Inc.'s procedures for opening an account and transacting in securities. The
number of shares available for sale to the general public will be reduced to
the extent that any reserved shares are purchased. Any reserved shares not
purchased by our directors, officers, employees, business associates, vendors
and related persons will be offered by the underwriters to the general public
on the same terms as the other shares offered by this prospectus.
Wit Capital Corporation
Wit Capital Corporation, a member of the National Association of Securities
Dealers, Inc., will participate in the offering as one of the underwriters. The
National Association of Securities Dealers, Inc. approved the membership of Wit
Capital on September 4, 1997. Since that time, Wit Capital has acted as an
underwriter, e-Manager or selected dealer in over 125 public offerings. Except
for its participation as a manager in this offering, Wit Capital has no
relationship with MotherNature.com, Inc., or any of its founders or significant
stockholders.
68
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for us by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Boston,
Massachusetts.
EXPERTS
Our financial statements and schedule as of December 31, 1998 and 1997, and
for the three years in the period ending December 31, 1998 included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including the exhibits, schedules and amendments
thereto) under the Securities Act with respect to the shares of common stock to
be sold in this offering. As permitted by the Securities Exchange Commission's
rules and regulations, this prospectus does not contain all the information set
forth in the registration statement. For further information regarding our
company and the shares of common stock to be sold in this offering, please
refer to the registration statement and the contracts, agreements and other
documents filed as exhibits to the registration statement.
You may read and copy all or any portion of the registration statement or any
other information that we file at the Securities Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by
writing to the Securities Exchange Commission. Please call the SEC at 1-800-
SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings, including the registration statement, are also
available to you on the Securities Exchange Commission's Web site
(http://www.SEC.gov).
As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance therewith, will
file periodic reports, proxy statements and other information with the
Securities and Exchange Commission.
We intend to furnish to our stockholders annual reports containing financial
statements audited by an independent public accounting firm.
69
<PAGE>
MOTHERNATURE.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Balance Sheets as of December 31, 1997 and 1998 and September 30, 1999
(Unaudited)............................................................. F-3
Statements of Operations for the Years Ended December 31, 1996, 1997 and
1998 and for the Nine Months Ended September 30, 1998 and 1999
(Unaudited)............................................................. F-4
Statements of Shareholders' Equity (Deficit) for the Years Ended December
31, 1996, 1997 and 1998 and for the Nine Months Ended September 30, 1999
(Unaudited)............................................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and
1998 and for the Nine Months Ended September 30, 1998 and 1999
(Unaudited)............................................................. F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
After the reverse stock split discussed in Note 7 is effected, we expect to be
in a position to render the following audit report.
/s/ Arthur Andersen LLP
November 4, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MotherNature.com, Inc.:
We have audited the accompanying balance sheets of MotherNature.com, Inc. (a
Delaware corporation) as of December 31, 1998 and 1997, and the related
statements of operations, shareholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MotherNature.com, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Boston, Massachusetts
February 17, 1999, except as to the
eleventh paragraph of Note 7 which
is as of .
F-2
<PAGE>
MotherNature.com, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
Pro Forma
Shareholders' Equity
September 30, (Deficit) at September 30,
1997 1998 1999 1999
--------- ----------- ------------- --------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents........... $ 4,241 $11,243,943 $ 27,647,394
Accounts receivable.... 6,961 10,914 113,363
Subscription
receivable............ -- 1,600,000 --
Inventories............ 30,635 27,752 2,344,855
Prepaid expenses....... -- 172,348 250,204
--------- ----------- ------------
Total current
assets.............. 41,837 13,054,957 30,355,816
--------- ----------- ------------
Property and equipment,
net.................... 48,176 383,856 2,167,799
Intangible assets....... -- -- 16,693,562
Other assets............ 293 22,800 617,422
--------- ----------- ------------
Total assets......... $ 90,306 $13,461,613 $ 49,834,599
========= =========== ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....... $ 75,504 $ 31,794 $ 4,817,470
Accrued expenses....... 4,481 681,356 6,930,490
Accrued compensation... 6,835 126,742 667,283
Other current
liabilities........... -- 2,250 --
Current portion of
notes payable......... 15,400 14,492 5,411
Current portion of
capital lease
obligations........... 5,056 4,416 528
--------- ----------- ------------
Total current
liabilities......... 107,276 861,050 12,421,182
Long-term portion of
notes payable.......... 44,517 13,142 11,204
Long-term portion of
capital lease
obligations............ 16,609 7,949 1,096
Shareholder advances
payable................ 13,804 -- --
Commitments and
contingencies (NOTE 9)
SHAREHOLDERS' EQUITY
(DEFICIT):
Preferred stock, $0.01
par value--
Authorized--
67,588,911 shares
Issued and
outstanding--
23,316,097 series A
shares, 23,019,375
series B-1 shares and
18,409,629 series C
shares; entitled to
$7,227,990,
$12,000,000 and
$41,950,022 in
liquidation,
respectively.......... -- 463,354 647,450 --
Common stock, $0 and
$0.01 par value in
1997 and 1998,
respectively, and
$0.01 par value in
1999--Authorized--
93,300,000 shares
Issued and
outstanding--685,634
and 669,972 shares in
1998 and 1997,
respectively,
1,918,978 in 1999,
and 10,974,370 in
1999, pro forma....... -- 6,856 19,190 109,744
Additional paid-in
capital................ 148,313 18,960,159 77,417,844 82,533,408
Deferred compensation... -- -- (438,888) (438,888)
Accumulated deficit..... (240,213) (6,850,897) (40,244,479) (44,803,147)
--------- ----------- ------------ ------------
Total shareholders'
equity (deficit).... (91,900) 12,579,472 37,401,117 37,401,117
========= =========== ============ ============
Total liabilities and
shareholders'
equity.............. $ 90,306 $13,461,613 $ 49,834,599
========= =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MotherNature.com, Inc.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
-------------------------------- -------------------------
1996 1997 1998 1998 1999
-------- --------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 21,489 $ 193,064 $ 476,549 $ 371,160 $ 2,589,048
Cost of sales........... 10,681 71,484 417,998 225,423 2,263,738
-------- --------- ----------- ----------- ------------
Gross profit.......... 10,808 121,580 58,551 145,737 325,310
Operating expenses:
Selling and
marketing............ 3,564 98,137 3,001,483 1,593,111 25,296,221
Product development... -- -- 2,135,570 1,360,559 4,454,763
General and
administrative....... 87,925 174,725 1,596,663 819,188 4,627,644
-------- --------- ----------- ----------- ------------
Total operating
expenses........... 91,489 272,862 6,733,716 3,772,858 34,378,628
-------- --------- ----------- ----------- ------------
Operating loss...... (80,681) (151,282) (6,675,165) (3,627,121) (34,053,318)
Interest income......... -- -- 110,113 66,112 768,921
Interest expense........ -- (8,250) (45,632) (31,074) (109,185)
-------- --------- ----------- ----------- ------------
Net loss............ $(80,681) $(159,532) $(6,610,684) $(3,592,083) $(33,393,582)
======== ========= =========== =========== ============
Basic and diluted net
loss per common share.. $ (0.19) $ (0.25) $ (9.83) $ (5.36) $ (39.43)
======== ========= =========== =========== ============
Pro forma basic and
diluted net loss per
common share........... $ (0.19) $ (0.25) $ (2.67) $ (1.87) $ (2.40)
======== ========= =========== =========== ============
Shares used to compute
basic and diluted net
loss per common share.. 430,474 650,607 672,289 669,972 846,953
======== ========= =========== =========== ============
Shares used to compute
pro forma basic and
diluted net loss per
common share........... 430,474 650,607 2,479,964 1,920,989 13,892,245
======== ========= =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
MotherNature.com, Inc.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------- ------------------ Additional Paid- Deferred Accumulated Total Shareholders'
Share Amount Shares Amount in Capital Compensation Deficit Equity (Deficit)
---------- -------- --------- ------- ---------------- ------------- ------------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December
31, 1995.......... -- $ -- 133,994 $ -- $ 200 $ -- $ -- $ 200
---------- -------- --------- ------- ----------- --------- ------------ -----------
Issuance of
common stock for
services
rendered......... -- -- 502,479 -- 75,000 -- -- 75,000
Net loss......... -- -- -- -- -- -- (80,681) (80,681)
---------- -------- --------- ------- ----------- --------- ------------ -----------
BALANCE, December
31, 1996.......... -- -- 636,473 -- 75,200 -- (80,681) (5,481)
Issuance of
common stock..... -- -- 13,399 -- 25,000 -- -- 25,000
Issuance of
common stock in
connection with a
note............. -- -- 10,050 -- 18,750 -- -- 18,750
Issuance of
common stock for
services
rendered......... -- -- 10,050 -- 18,750 -- -- 18,750
Deemed capital
contribution..... -- -- -- -- 10,613 -- -- 10,613
Net loss......... -- -- -- -- -- -- (159,532) (159,532)
---------- -------- --------- ------- ----------- --------- ------------ -----------
BALANCE, December
31, 1997.......... -- -- 669,972 -- 148,313 -- (240,213) (91,900)
Retirement of
common stock in
connection with
reincorporation.. -- -- (669,972) -- (148,313) -- -- (148,313)
Issuance of
common stock in
connection with
reincorporation.. -- -- 669,972 6,700 141,613 -- -- 148,313
Issuance of
detachable
warrants for
Secured
Convertible Note
Financing........ -- -- -- -- 2,416 -- -- 2,416
Conversion of
promissory notes
into Series A
convertible
preferred stock.. 1,290,323 12,903 -- -- 384,681 -- -- 397,584
Issuance of
Series A
convertible
preferred stock,
net of issuance
costs............ 21,854,839 218,548 -- -- 6,516,452 -- -- 6,735,000
Exercise of
common stock
options.......... -- -- 15,662 156 3,351 -- -- 3,507
Conversion of
loans and
advances into
Series A
convertible
preferred stock.. 170,935 1,709 -- -- 51,281 -- -- 52,990
Compensation
expense related
to common stock
options.......... -- -- -- -- 24,855 -- -- 24,855
Issuance of
detachable
warrants for
Series A
convertible
preferred stock.. -- -- -- -- 106,065 -- -- 106,065
Issuance of
Series B-1
convertible
preferred stock,
net of issuance
costs............ 23,019,375 230,194 -- -- 11,729,445 -- -- 11,959,639
Net loss......... -- -- -- -- -- -- (6,610,684) (6,610,684)
---------- -------- --------- ------- ----------- --------- ------------ -----------
BALANCE, December
31, 1998.......... 46,335,472 463,354 685,634 6,856 18,960,159 -- (6,850,897) 12,579,472
Additional costs
of Series B-1
convertible
preferred stock
issuance......... -- -- -- -- (21,261) -- -- (21,261)
Exercise of
common stock
options and
warrants......... -- -- 259,300 2,593 64,133 -- -- 66,726
Issuance of
Series C
convertible
preferred stock,
net of issuance
costs............ 18,409,629 184,096 -- -- 40,820,153 -- -- 41,004,249
Compensation
expense related
to common stock
options and
warrants......... -- -- -- -- 267,132 -- -- 267,132
Deferred
compensation..... -- -- -- -- 550,314 (550,314) -- --
Amortization of
deferred
compensation..... -- -- -- -- -- 111,426 -- 111,426
Issuance of
common stock in
connection with
Rodale alliance
(Note 3)......... -- -- 974,044 9,741 16,777,214 -- -- 16,786,955
Net loss......... -- -- -- -- -- -- (33,393,582) (33,393,582)
---------- -------- --------- ------- ----------- --------- ------------ -----------
BALANCE, September
30, 1999
(unaudited)....... 64,745,101 $647,450 1,918,978 $19,190 $77,417,844 $(438,888) $(40,244,479) $37,401,117
========== ======== ========= ======= =========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MotherNature.com, Inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
-------------------------------- -------------------------
1996 1997 1998 1998 1999
-------- --------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............... $(80,681) $(159,532) $(6,610,684) $(3,592,083) $(33,393,582)
Adjustments to
reconcile net loss to
net cash used in
operating activities-
Depreciation and
amortization......... 1,364 9,039 850,112 50,932 459,308
Common stock issued
for services
rendered............. 75,000 18,750 -- -- --
Loss on disposal of
equipment............ -- -- 33,265 9,743 32,399
Compensation expense
relating to common
stock options and
warrants............. -- -- 24,855 20,182 267,132
Amortization of
deferred
compensation......... -- -- -- -- 111,426
Amortization of debt
discount............. -- 4,228 18,045 -- 4,787
Amortization of in-
tangible assets...... -- -- -- -- 413,393
Changes in operating
assets and
liabilities-
Accounts receivable... -- (5,861) (3,953) (30,490) (102,449)
Inventories........... (799) (29,836) 2,883 (34,079) (2,317,103)
Prepaid expenses...... (734) -- (41,283) (14,415) (100,356)
Intangible assets..... -- -- -- -- (320,000)
Other assets.......... -- -- (22,507) (20,905) (594,622)
Accounts payable...... 3,094 72,410 (43,710) (150,214) 4,785,676
Accrued expenses...... 75 4,406 678,950 524,622 6,249,134
Accrued
compensation......... -- 6,835 119,907 (2,967) 540,541
Other current
liabilities.......... -- -- 2,250 -- (2,250)
-------- --------- ----------- ----------- ------------
Net cash used in
operating
activities......... (2,681) (79,561) (4,991,870) (3,239,674) (23,966,566)
-------- --------- ----------- ----------- ------------
INVESTING ACTIVITIES:
Purchases of property
and equipment........ (5,500) (28,391) (1,214,057) (280,848) (2,253,150)
-------- --------- ----------- ----------- ------------
FINANCING ACTIVITIES:
Cash paid to secure
financing............ -- -- (30,000) -- --
Repayments of capital
lease obligations.... -- (2,582) (9,300) (8,177) (10,741)
Proceeds from
shareholder advances
payable.............. 4,382 8,322 -- -- --
Proceeds from
(repayment of) notes
payable.............. 4,650 80,402 (13,217) (13,134) (15,806)
Proceeds from Secured
Convertible
Promissory Note
Financing............ -- -- 400,000 400,000 --
Proceeds from Series
A Preferred
Financing, net of
issuance costs....... -- -- 6,735,000 6,802,694 --
Proceeds from Series
B-1 Preferred
Financing, net of
issuance costs....... -- -- 10,359,639 -- 1,578,739
Proceeds from Series
C Preferred
Financing, net of
issuance costs....... -- -- -- -- 41,004,249
Proceeds from
exercise of common
stock options........ -- -- 3,507 -- 66,726
Loans to officers .... -- -- -- (17,550) --
Proceeds from
issuance of common
stock................ -- 25,000 -- -- --
-------- --------- ----------- ----------- ------------
Net cash provided by
financing
activities......... 9,032 111,142 17,445,629 7,163,833 42,623,167
-------- --------- ----------- ----------- ------------
Net increase in cash
and cash
equivalents........ 851 3,190 11,239,702 3,643,311 16,403,451
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 200 1,051 4,241 4,241 11,243,943
-------- --------- ----------- ----------- ------------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 1,051 $ 4,241 $11,243,943 $ 3,647,552 $ 27,647,394
======== ========= =========== =========== ============
SUPPLEMENTAL DISCLOSURE
OF NONCASH FINANCING
ACTIVITY:
Conversion of loans
and advances into
preferred stock...... $ -- $ -- $ 52,990 $ -- $ --
======== ========= =========== =========== ============
Issuance of common
stock in connection
with Rodale
alliance............. $ -- $ -- $ -- $ -- $ 16,786,955
======== ========= =========== =========== ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid during the
year for interest.... $ -- $ 740 $ 19,030 $ 5,615 $ 2,351
======== ========= =========== =========== ============
Cash paid during the
year for taxes....... $ -- $ -- $ -- $ -- $ 37,500
======== ========= =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
(1) Summary of Significant Accounting Policies
Description of Business
MotherNature.com, Inc. (MotherNature.com or the Company), formerly Mother
Nature's General Store, Inc., is an online retail store and information site
for vitamins, supplements, minerals and other natural and healthy living
products. The Company currently offers approximately 13,000 products on its
site and can special order additional products through its supplier
relationships. MotherNature.com also provides educational and authoritative
news and information about its products and healthy living in general.
The Company, originally incorporated in the Commonwealth of Pennsylvania in
December 1995, reincorporated in the State of Delaware in June 1998 prior to
its first round of financing. Since its inception, the Company has incurred
significant losses and as of September 30, 1999 had an accumulated deficit of
approximately $40.2 million. The Company has incurred costs to develop and
enhance its technology, to create, introduce and enhance its Web site, to
establish marketing and distribution relationships and to build its
administrative organization. The Company intends to continue to invest heavily
in marketing and promotion, development of its Web site, technology and
administrative organization. As a result, the Company believes that it will
incur substantial operating losses for the foreseeable future. There can be no
assurance that the Company will be able to generate sufficient revenues to
achieve or sustain profitability in the future.
The Company has been funded principally from the issuance of preferred stock
in June/July 1998, December 1998/January 1999 and May 1999 (the Series A, B-1,
and C Preferred Financings) in the amounts of $7.2 million, $12.0 million and
$42.0 million, respectively (see Note 8).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
reported amounts of net sales and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents are carried at cost plus accrued interest, which
approximates fair value. The Company considers all highly liquid investments
with an original maturity date of three months or less to be cash equivalents.
Revenue Recognition
Net sales, which consist primarily of vitamins, supplements, minerals, and
other natural and healthy living products sold via the Internet, include
outbound shipping and handling charges incurred by the customer and are
recognized at the time of shipment. The Company generally does not extend
credit to customers, except through third-party credit cards. Credit card sales
account for approximately 99% of total sales. Credit under these accounts is
extended by third parties, and accordingly, the Company bears no financial risk
under these agreements except in the case of fraud. The Company's agreements
with third-party credit companies provide for the electronic processing of
credit approvals and the electronic submission of transactions. Upon the
submission of these transactions to the credit card companies, payment is
transmitted to the Company's bank account. Accordingly, the Company records
these amounts as cash upon the electronic submission of the
F-7
<PAGE>
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
transaction to the appropriate processing agency. Payment from the credit card
companies usually occurs within three to five days and the obligations are
reflected in accounts receivable during that waiting period. Due primarily to
the credit card sales, the Company has historically experienced only immaterial
and infrequent bad debt write-offs. As such, no allowance for doubtful accounts
is recorded.
Sales are recorded net of returns, promotional discounts and coupons. Company
policy is to record a sales returns reserve for anticipated future returns;
however, prior to the Company's quarter ended June 30, 1999, sales returns have
been immaterial and were consequently netted from revenue as incurred.
Inventories
Inventories are stated at the lower of cost or market and are valued using
the first-in, first-out (FIFO) method. Cost of sales includes purchased
merchandise and outbound freight incurred by the Company.
Selling and Marketing Expense
Selling and marketing expense includes advertising and promotional
expenditures, including sales commissions paid as part of the affiliates
program, Web content expenditures, including third-party content license fees,
fulfillment facility expenses and payroll and related expenses for personnel
engaged in marketing, fulfillment and customer service operations. Advertising
expenditures are expensed as incurred as such efforts historically have not met
the direct-response criteria required for capitalization. MotherNature.com
advertising to date has related primarily to building brand awareness,
including traditional media advertising such as television, radio, print and
billboards and promotions. Total advertising and promotion costs for the years
ended December 31, 1996, 1997 and 1998, and for the nine months ended September
30, 1998 and 1999, were $0, $257 and $1,900,561, and $960,648 and $20,218,401,
respectively.
Product Development Expense
Product development expense includes payroll and related expenses for
merchandising, Web site development, Web design and information technology
personnel and related infrastructure.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, requires that stock awards granted subsequent to
January 1, 1995 be recognized as compensation expense based on their fair value
at the date of grant. Alternatively, a company may use Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and
disclose pro forma income amounts that would have resulted from recognizing
such awards at their fair value. The Company has elected to account for stock-
based compensation expense under APB No. 25 and make the required pro forma
disclosures for compensation (see Note 8).
Income Taxes
The Company records income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes. Under SFAS No. 109, the liability method is used in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities and are measured using enacted tax
rates. A valuation allowance has been established against the deferred tax
assets because the Company believes it is more likely than not that the benefit
will not be realized.
F-8
<PAGE>
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, notes payable, capital lease obligations, and accounts
payable, and are carried at cost or carrying value. These amounts were not
materially different from their fair values. The Company used a discounted cash
flows methodology to calculate the fair value of the notes payable and capital
leases.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted
number of common shares outstanding for all periods presented. Diluted net loss
per share reflects the dilutive effect of shares under option plans, warrants
and convertible preferred stock. Potentially dilutive shares outstanding during
the period have been excluded from diluted net loss per share because their
effect would be anti-dilutive. Pro forma net loss per share is computed using
the weighted average number of common shares outstanding, including both the
pro forma effects of the automatic conversion of the Company's convertible
preferred stock into shares of the Company's common stock and certain
antidilution adjustments (see Note 13), effective upon the closing of the
Company's initial public offering as if such conversion occurred on June 10,
1998, or at the date of the original issuance, if later.
The weighted average common shares outstanding, the dilutive effect of
outstanding stock options and warrants, the pro forma weighted average number
of common shares outstanding, and the shares under option plans, warrants and
convertible preferred stock which were antidilutive for the periods ended
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999 are as
follows:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------- --------------------
1996 1997 1998 1998 1999
------- ------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Weighted average common shares
used in basic EPS
calculation.................. 430,474 650,607 672,289 669,972 846,953
Additional weighted average
common shares used in diluted
EPS calculation.............. -- -- -- -- --
Weighted average convertible
preferred shares assumed to
convert to common shares..... -- -- 1,807,675 1,251,017 13,045,292
------- ------- --------- --------- ----------
Weighted average common shares
used in pro forma basic and
diluted EPS calculations..... 430,474 650,607 2,479,964 1,920,989 13,892,245
======= ======= ========= ========= ==========
Shares under option plans,
warrants and convertible
preferred stock excluded in
computation of diluted
earnings per share due to
antidilutive effects......... -- -- 7,524,152 4,169,020 10,582,338
======= ======= ========= ========= ==========
</TABLE>
All share amounts in the table above give retroactive effect to the reverse
stock split of October 1999. (See Note 8. )
Unaudited Interim Information
The financial information as of September 30, 1999, and for the nine months
ended September 30, 1998 and 1999 is unaudited. In the opinion of management,
such information contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of such period.
The interim results are not necessarily indicative of results for the year.
F-9
<PAGE>
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
Comprehensive Income
Comprehensive income is defined as the change in net assets of a business
enterprise during a period from transactions generated from nonowner sources.
It includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The Company had no material
other comprehensive income in any of the periods presented.
Segment Information
The Company complies with the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Company identifies its
operating segments based on business activities and management responsibility.
The Company operates in a single business segment selling vitamins,
supplements, minerals and other natural and healthy living products online.
International sales were less than 8% of revenues in all periods.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, requiring computer software
costs associated with internal-use software to be expensed as incurred until
certain capitalization criteria are met. The Company adopted SOP 98-1 for the
year ended December 31, 1998. Adoption of this statement did not have a
material impact on the Company's financial position or results of operations.
In accordance with SOP 98-1, approximately $32,000 and $14,500 of software
costs were capitalized and expensed during 1998, respectively.
In April 1998, the AICPA issued SOP 98-5, Reporting on Costs of Start-up
Activities, requiring all costs associated with preopening, preoperating and
organization activities to be expensed as incurred. The Company has adopted the
statement for the year ended December 31, 1998 and has expensed all costs of
start-up activities. However, as SOP 98-5 is consistent with the Company's
existing policy, there is no cumulative effect of a change in accounting
principal in the accompanying financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. As
issued, SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999, with earlier application encouraged. In May
1999, the FASB delayed the effective date of SFAS No. 133 for one year, to
fiscal years beginning after June 15, 2000. The Company does not currently nor
does it intend in the future to issue derivative instruments and therefore does
not expect that the adoption of SFAS No. 133 will have any impact on its
financial position or results of operations.
(2) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Expenditures that significantly improve or extend the life of an asset are
capitalized. Maintenance and repairs are charged to expense when incurred.
Depreciation of property and equipment is calculated on the straight-line basis
over an estimated useful life of two to five years. Leasehold improvements and
equipment under capital leases are amortized over the shorter of the related
lease term or the useful life of the asset.
F-10
<PAGE>
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
September 30,
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
Computer equipment and software........... $20,831 $419,489 $2,287,607
Office equipment and furniture............ 13,009 27,910 270,830
Equipment under capital lease............. 24,298 18,413 5,924
Leasehold improvements.................... -- 16,800 96,317
Motor vehicle............................. -- -- 20,931
------- -------- ----------
58,138 482,612 2,681,609
Less -- Accumulated depreciation and
amortization............................. (9,962) (98,756) (513,810)
------- -------- ----------
$48,176 $383,856 $2,167,799
======= ======== ==========
</TABLE>
For the years ended December 31, 1996, 1997 and 1998, depreciation expense
was $1,217, $8,745 and $845,112, respectively. For the nine months ended
September 30, 1998 and 1999, depreciation expense was $50,932 and $436,808,
respectively. The net book value of property and equipment under capital leases
was $21,829 and $11,748 at December 31, 1997 and 1998, respectively, and
$12,866 and $1,316 at September 30, 1998 and 1999, respectively. Amortization
expense for assets under capital lease was $0, $2,469, $4,472, $4,032 and
$1,481 for the years ended December 31, 1996, 1997, 1998 and the nine months
ended September 30, 1998 and 1999, respectively. Amortization expense for
assets under capital lease has been included in depreciation expense for all
periods.
(3) Rodale Alliance
In September 1999, the Company entered into a strategic relationship with
Rodale Inc. whereby the Company issued 974,044 shares of common stock in
exchange for rights to reproduce certain content, the right to utilize certain
customer lists and the provision of certain advertising services. The shares
issued at the close of the transaction were valued at approximately $16.8
million or $17.23 per share. In addition, the Company has paid an aggregate of
$320,000 as one-time licensing fees with respect to the reproduction of certain
Rodale content which was authorized by third parties. The Company's Board of
Directors had an independent valuation performed to assist in the allocation of
the consideration paid for the various intangible rights and assets acquired
from Rodale Inc. The value of the customer lists, advertisements and inserts
were based on market prices. Any residual value was assigned to the value of
the content.
The Company's intangible assets, and their estimated useful lives, consist of
the following:
<TABLE>
<CAPTION>
December 31,
---------------
September 30, Useful
1997 1998 1999 Life
------ ------ ------------- --------
<S> <C> <C> <C> <C>
Customer lists...................... -- -- $ 2,101,584 7 Years
Prevention advertisements........... -- -- 1,137,000 10 Years
Inserts............................. -- -- 463,731 10 Years
Content ............................ -- -- 13,404,640 3 Years
------ ------ -----------
17,106,955
Accumulated amortization............ (--) (--) (413,393)
------ ------ -----------
-- -- $16,693,562
====== ====== ===========
</TABLE>
F-11
<PAGE>
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, the carrying value of
intangible assets will be periodically reviewed by the Company and impairments
will be recognized when the expected future operating cash flows derived from
such intangible assets is less than their carrying value.
(4) Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------- September 30,
1997 1998 1999
------ -------- -------------
<S> <C> <C> <C>
Accrued professional services.................. $1,200 $236,757 $1,082,735
Accrued marketing.............................. -- 243,299 4,840,481
Other accrued expenses......................... 3,281 201,300 1,007,274
------ -------- ----------
$4,481 $681,356 $6,930,490
====== ======== ==========
</TABLE>
(5) Employee Benefit Plans
The Company has a savings plan (the 401(k) Plan), which qualifies as a
defined contribution arrangement under Section 401(a), 401(k) and 501(a) of the
Internal Revenue Code. Under the 401(k) Plan, participating employees may defer
a percentage (not to exceed 15%) of their eligible pretax earnings up to the
Internal Revenue Service's annual contribution limit. All employees on the
payroll of the Company are eligible to participate in the 401(k) Plan. The
Company will determine its contributions, if any, based on its current profits
and/or retained earnings; however, no contributions have been made since the
inception of the 401(k) Plan.
(6) Debt
In December 1998, the Company entered into a loan and security agreement (the
Loan Agreement) with a bank (the Bank) to borrow up to $500,000 under a
revolving credit facility (the Credit Facility) and/or a 36-month equipment
term loan facility (the Equipment Loan). The interest rate per year on the
Credit Facility is equal to the Bank's prime rate for the initial six months of
the Credit Facility, and the Bank's prime rate plus 25 basis points thereafter.
The interest rate per year on the Equipment Loan is equal to the Bank's prime
rate plus 75 basis points. The Bank's prime rate as of September 30, 1999 was
8.25%. On the first advance date of the Equipment Loan, the Company may, at its
option, elect a fixed interest rate on the Equipment Loan, at a rate determined
by the Bank, which shall thereafter be applicable to all advances under the
Equipment Loan. After the last advance date, the unpaid principal balance of
the Equipment Loan is payable in 30 monthly installments of principal plus
interest. As security for the loan, the Bank has a perfected security interest
in all of the Company's personal property and in all proceeds and products
thereof. To date, the Company has used the Credit Facility to fund corporate
credit card expenses which under the terms of the Credit Facility may not
exceed $175,000 at any time and are required to be repaid on a monthly basis.
In December 1998, the Company entered into a subordinated loan and security
agreement (the Subordinated Loan Agreement) with a commercial lender (the
Commercial Lender). The Subordinated Loan Agreement allows the Company to
borrow up to $3 million, during the one-year period beginning December 1998, in
minimum installments of $250,000 each, at an interest rate of prime plus 50
basis points per year, fixed at the time of the advance. The Commercial
Lender's prime rate as of September 30, 1999 was 8.25%. Interest on each
advance is due and payable in 12 equal monthly installments, followed by 24
equal monthly
F-12
<PAGE>
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
installments of principal and interest. As a condition to entering into the
Subordinated Loan Agreement, the Commercial Lender required the Company to pay
a commitment fee equal to 1% of the total amount available for borrowing, which
the Company has capitalized in the accompanying balance sheet. As security for
the loan, the Commercial Lender has a perfected secondary security interest in
the Company's personal property and in all proceeds and products thereof. In
addition, the Commercial Lender may convert, on one occasion only, up to 30% of
the original aggregate principal amount of all advances under the Subordinated
Loan Agreement into shares of common stock at a price of $3.73 per share. To
date, the Company has had no outstanding borrowings under the Subordinated Loan
Agreement. In connection with the Subordinated Loan Agreement, the Company
issued warrants to the Commercial Lender to purchase 63,960 shares of common
stock with an exercise price of approximately $3.73 per share. These warrants
are exercisable until the earlier of the seventh anniversary of the date of the
Subordinated Loan Agreement or the third anniversary of the effective date of
the Company's initial public offering. These warrants were valued using the
Black-Scholes option-pricing model (see Note 8).
In addition, the Company also entered into a master lease agreement (the
Lease Agreement) with the Commercial Lender. Pursuant to the Lease Agreement,
the Commercial Lender has agreed to lease to the Company certain equipment
specifically approved by the Commercial Lender, during the one-year period
beginning December 1998, up to an aggregate purchase price of $300,000. The
term of the lease is 48 months, and the Company will have the option at the
expiration of the initial term of the equipment lease to purchase all of the
equipment for a purchase price not to exceed 15% of the equipment cost. As of
December 31, 1998, and as of September 30, 1999, the Company had no outstanding
borrowings under the Lease Agreement. Borrowings under the Lease Agreement will
be accounted for as capital leases when such borrowings occur. In connection
with the Lease Agreement, the Company issued warrants to purchase 2,399 shares
of common stock with an exercise price of approximately $3.75 per share. These
warrants are exercisable until the earlier of the seventh anniversary of the
date of the Lease Agreement or the third anniversary of the effective date of
the Company's initial public offering. These warrants were valued using the
Black-Scholes option-pricing model (see Note 8).
(7) Note Payable
In 1997, the Company borrowed $35,000 from a vendor in the form of a
promissory note (the Note), payable in monthly installments of $2,000 at an
interest rate of 10% per year, commencing January 1, 1999. The Company also
issued a total of 20,100 shares of common stock to the vendor, 10,050 of which
related to the Note. The estimated value of the common stock was recorded as an
original issue discount on the Note and will be amortized over the term of the
Note. At December 31, 1997 and 1998, and at September 30, 1999, the balance on
the Note, net of the original issue discount, was $19,860 and $27,634, and
$16,615, respectively.
(8) Shareholders' Equity
Reincorporation and Authorized Capital
Prior to June 1998, the Company was incorporated in the Commonwealth of
Pennsylvania with authorized capital of 10,000,000 shares of no par value
common stock. In June 1998, the Company reincorporated in the state of Delaware
with authorized capital of 40,000,000 shares of $0.01 par value common stock
and 47,490,000 shares of $0.01 par value preferred stock. In May 1999, the
Company increased its authorized common stock to 86,000,000 shares and
increased its authorized preferred stock to 67,588,911 shares. In September
1999, the Company increased its authorized common stock to 93,300,000 shares.
F-13
<PAGE>
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
Preferred Stock
The Company has authorized Series A Preferred, Series B-1 Preferred, Series
B-2 Preferred and Series C Preferred. In the event of a public offering of the
Company's equity securities effective on or before December 31, 1999 and
resulting in gross proceeds to the Company of $20,000,000 or greater, each
outstanding share of Series A Preferred, Series B-1 Preferred and Series B-2
Preferred will automatically convert into approximately 0.13 shares of common
stock as described below, and under the circumstances described in Note 12, the
Series C Preferred will automatically convert into approximately 0.15 shares of
common stock.
In June and July 1998, the Company issued 21,854,839 shares of Series A
Preferred at a price of $0.31 per share in conjunction with the Series A
Preferred Financing and 1,290,323 shares of Series A Preferred in conjunction
with the conversion of $400,000 in principal amount of secured convertible
notes. Additionally, in July and November 1998, the Company issued 170,935
shares of Series A Preferred in consideration for the forgiveness of
shareholder advances and loans payable. The Series A Preferred is convertible
at the option of the holder, at any time, at a rate of approximately 0.13
shares of common stock for one share of Series A Preferred, subject to certain
antidilution adjustments.
In December 1998 and January 1999, the Company issued 19,950,125 and
3,069,250 shares of Series B-1 Preferred, respectively, at a price of $0.5213
per share in conjunction with the Series B-1 Preferred Financing. The shares
issued in January 1999 were issued pursuant to a binding agreement entered into
in December 1998 and have been included in the total shares of Series B-1
Preferred in the accompanying financial statements at December 31, 1998. The
Series B-1 Preferred is convertible at the option of the holder, at any time,
at a rate of approximately 0.13 shares of common stock for one share of Series
B-1 Preferred, subject to certain antidilution adjustments.
In May 1999, the Company issued 18,409,629 shares of Series C Preferred at a
price of $2.2787 per share in conjunction with the Series C Preferred
Financing. The Series C Preferred is convertible at the option of the holder,
at any time, at a rate of approximately 0.15 shares of common stock for one
share of Series C Preferred, subject to certain antidilution adjustments (see
Note 13).
Voting
Each share of Series A Preferred, Series B-1 Preferred, Series B-2 Preferred
and Series C Preferred entitles the holder to the number of votes per share as
equals the number of shares of common stock into which each share of preferred
stock is convertible.
Dividends
The holders of Series A Preferred, Series B-1 Preferred, Series B-2 Preferred
and Series C Preferred are entitled to receive, when and if declared by the
Board of Directors, quarterly dividends at the rate of $0.0186, $0.0313, $0.03
and $0.1367 per share, respectively. The preferred dividends are not
cumulative. For the year ended December 31, 1998, and for the nine months ended
September 30, 1999, the Company did not declare any dividends.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series A Preferred, Series B-1 Preferred, Series B-2 Preferred
and Series C Preferred are entitled to receive, in preference to the holders of
common stock, any distribution of assets of the Company in an amount per share
equal to $0.31, $0.5213, $0.50, and $2.2787 respectively, plus any declared but
unpaid dividends.
F-14
<PAGE>
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
Common Stock
Each share of common stock entitles the holder to one vote per share. In
April 1998, the Company effected a 5,000-for-1 stock split in the form of a
stock dividend. All references in the financial statements to the number of
shares and to per share amounts have been retroactively restated to reflect
these changes.
In September 1999, the Company entered into a strategic relationship with
Rodale Inc. whereby the Company issued 974,044 shares of common stock in
exchange for access to certain Rodale Inc. content, customer lists and
advertising. See Note 3.
In October 1999, the Company's Board of Directors declared a reverse stock
split of 1 share for every 7.463 shares of common stock then outstanding. The
stock split will become effective at the date the Company's registration
statement for its initial public offering is declared effective. Accordingly,
the accompanying financial statements and footnotes have been restated to
reflect the stock split.
Warrants
In April 1998, the Company issued warrants to purchase an aggregate of 40,199
shares of common stock at an exercise price of $0.07 per share, fair market
value of common stock at date of grant, to a founding employee of the Company
and to a non-employee, early contributor to the Company. These warrants expire
on April 29, 2003. Using the Black-Scholes option-pricing model, the warrants
issued to the non-employee were valued at $50, which was recorded as expense in
1998. In July 1999, 6,700 warrants were exercised by a non-employee.
In May 1998, the Company issued detachable warrants, in connection with a
$400,000 secured convertible note financing (the Secured Convertible Note
Financing) to purchase 34,580 shares of common stock at an exercise price of
$2.31 per share. Using the Black-Scholes option pricing model, the warrants
were valued at approximately $2,400 and were fully expensed at the conversion
date, June 10, 1998. These warrants expire on May 1, 2006.
As consideration for the Subordinated Loan Agreement and the Lease Agreement,
the Commercial Lender received warrants to purchase 66,359 shares of common
stock at a price of approximately $3.75 per share, fair market value of
preferred stock at date of grant (see Note 5). Using the Black-Scholes option-
pricing model, the warrants were valued at $106,065 and were included in
prepaid expenses, net of amortization, on the balance sheet at December 31,
1998. The expense will be amortized over the term of the Subordinated Loan
Agreement and the Lease Agreement.
In May 1999, the Company issued warrants, in connection with the services
provided by an investment bank (the Investment Bank) for the Series C Preferred
Financing, to purchase 18,376 shares of common stock at an exercise price of
$20.41 per share, subject to adjustment of the conversion price of the Series C
Preferred (see Note 12). As a result of the events described in Note 12, the
option is currently exercisable for 24,696 shares of common stock at an
exercise price of $16.38 per share. These warrants expire on May 12, 2004.
Using the Black-Scholes option-pricing model, the warrants issued to the
Investment Bank were valued at $200,438, which was recorded as a reduction to
the Series C Preferred Financing proceeds received in 1999.
In June 1999, the Company issued warrants, in connection with a lease
agreement entered into with a landlord (the Landlord), to purchase an aggregate
of up to 804 shares of the Company's common stock at an exercise price per
share of $18.65, fair market value of the common stock at the date of grant.
The warrants are exercisable at any time prior to June 22, 2002. Using the
Black-Scholes option-pricing model, the warrants issued to the landlord were
valued at $9,665, which was recorded as expense in 1999.
F-15
<PAGE>
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
Stock Options
In June 1998, the Company adopted the MotherNature.com, Inc. 1998 Stock Plan,
as amended in June 1998 (the Plan), which authorizes the Company to grant
options to purchase up to an aggregate of 929,653 shares of common stock. Later
in June 1998, the Plan was amended to increase the aggregate number of shares
of common stock issuable under the Plan to 1,274,554, and in May 1999, the Plan
was amended again to increase the number of shares issuable under the Plan to
1,695,728. Under the Plan, incentive and nonqualified stock options, awards of
stock and opportunities to make direct purchases of stock may be granted to
employees, officers, directors, independent contractors and consultants.
Generally, options are granted by the Company's Board of Directors or the
Compensation Committee of the Board of Directors. Each outstanding option
granted under the Plan expires at various dates, not to exceed 10 years from
the date of grant, and becomes exercisable in varying installments as
determined by the Board of Directors, or the Compensation Committee of the
Board of Directors, at the date of grant. In July 1999, the Board of Directors
adopted the 1999 Stock Plan, which was approved by our stockholders in October
1999 (see Note 14).
In 1998, and for the nine months ended September 30, 1999, the Company
granted nonqualified stock options to purchase a total of 3,886 shares and
43,282 shares, respectively, of common stock to non-employees under the Plan
with immediate vesting. As prescribed by SFAS No. 123, the options were valued,
using the Black-Scholes option-pricing model, at $1,305, and $254,149,
respectively, which was recorded as expense in the Company's statements of
operations. In addition, in 1998 the Company granted nonqualified stock options
to purchase a total of 294,788 shares of common stock to non-employees under
the Plan with a three-year vesting period as follows: 34% immediately and an
additional 22% after years one, two and three. Using the Black-Scholes option-
pricing model, these options were valued at $60,000 and will be amortized to
expense over the vesting period. For the year ended December 31, 1998 and the
nine months ended September 30, 1999, $23,500 and $3,318, respectively, was
recorded as expense. During 1999, all the unvested options related to these
grants were cancelled.
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- --------
<S> <C> <C>
Balance, December 31, 1997............................... -- $ --
Options granted........................................ 1,367,512 0.30
Options canceled....................................... (158,806) 0.22
Options exercised...................................... (15,662) 0.22
---------
Balance, December 31, 1998............................... 1,193,044 0.21
Options granted........................................ 757,358 16.55
Options canceled....................................... (330,803) 1.90
Options exercised...................................... (252,591) 0.26
--------- ------
Balance, September 30, 1999.............................. 1,367,008 $ 8.93
========= ======
</TABLE>
Options granted during the period ended September 30, 1999 resulted in a
total deferred compensation amount of $550,314. This amount will be recognized
as compensation expense over the vesting period. During the nine months ended
September 30, 1999, such compensation expense amounted to $111,426. At December
31, 1998 and September 30, 1999, 65,848 and 60,467 shares of common stock,
respectively, were available for future grant under the Plan.
F-16
<PAGE>
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
The following table summarizes information about options outstanding and
exercisable at September 30, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Remaining Weighted Weighted
Exercise Options Contractual Average Options Average
Prices Outstanding Life Exercise Price Exercisable Exercise Price
- -------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.22........ 481,624 8.78 years $ 0.22 83,101 $ 0.22
$0.75........ 216,649 9.24 years $ 0.75 3,551 $ 0.75
$2.99........ 88,839 9.31 years $ 2.99 9,380 $ 2.99
$5.22........ 9,862 9.34 years $ 5.22 3,564 $ 5.22
$7.46........ 36,062 9.48 years $ 7.46 4,438 $ 7.46
$14.93....... 63,649 9.62 years $14.93 2,814 $14.93
$18.66....... 34,036 9.73 years $18.66 12,529 $18.66
$22.39....... 436,287 9.86 years $22.39 12,921 $22.39
--------- -------
$0.22-22.39.. 1,367,008 9.32 years $ 8.93 132,298 $ 5.03
========= =======
</TABLE>
If the Company had accounted for the Plan and for the warrants issued in
connection with the Secured Convertible Note Financing in accordance with SFAS
No. 123, the Company's net loss and net loss per share would have been
increased to the following pro forma amounts:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
-------------------------------- -------------------------
1996 1997 1998 1998 1999
-------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net loss, as reported... $(80,681) $(159,532) $(6,610,684) $(3,592,083) $(33,393,582)
Net loss, pro forma..... $(80,681) $(159,532) $(6,651,747) $(3,597,581) $(33,826,652)
Basic and diluted net
loss per common share,
as reported............ $ (0.19) $ (0.25) $ (9.83) $ (5.36) $ (39.43)
Basic and diluted net
loss per common share,
pro forma.............. $ (0.19) $ (0.25) $ (2.67) $ (1.87) $ (2.40)
Basic and diluted net
loss per common share,
pro forma, for
convertible preferred
shares................. $ (0.19) $ (0.25) $ (2.68) $ (1.87) $ (2.43)
</TABLE>
The fair value of each option grant and of the warrants issued in connection
with the Secured Convertible Note Financing was calculated using the Black-
Scholes option-pricing model. For the year ended December 31, 1998 and the nine
months ended September 30, 1999 the weighted average value was calculated using
an expected life of approximately four years (two years for non-qualified stock
options), a dividend yield of 0%, a risk-free interest rate of 5.40% and a
volatility of 100%. The weighted-average fair value of options granted during
1998 and for the nine months ended September 30, 1999, using the Black-Scholes
option-pricing model, was $0.2120 and $11.6555, respectively.
(9) Commitments and Contingencies
The Company currently leases office and distribution center facilities and
fixed assets under noncancelable operating and capital leases. Rental expense
under operating lease agreements for 1996, 1997 and 1998 was $0, $4,000 and
$81,400, respectively. Rental expense under operating lease agreements for the
nine months ended September 30, 1998 and 1999 was $46,200 and $231,598,
respectively.
F-17
<PAGE>
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
Future minimum commitments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases Advertising
------- --------- -----------
<S> <C> <C> <C>
Year ending December 31,
1999.................... $ 5,297 $101,450 $494,640
2000.................... 4,175 98,750 --
2001.................... 3,053 52,500 --
2002.................... 1,527 -- --
2003.................... -- -- --
Thereafter.............. -- -- --
------- -------- --------
Total minimum lease and
advertising payments... 14,052 $252,700 $494,640
------- -------- --------
Less--Interest.......... 1,687
-------
Present value of net
minimum lease pay-
ments.................. 12,365
Less--Current portion... 4,416
-------
Long-term capital lease
obligation............. $ 7,949
=======
</TABLE>
As of September 30, 1999, the Company had media purchase commitments, which
consist of offline advertising, totalling approximately $11,800,000. The
offline advertising includes primarily television, radio and print advertising
commitments, which will expire over the remainder of 1999.
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
for contingent liabilities when it is probable that future expenditures will be
made and such expenditures can be reasonably estimated. In the opinion of
management, there are no pending claims of which the outcome is expected to
result in a material adverse effect in the financial position or results of
operations of the Company.
(10) Income Taxes
Due to losses incurred since inception of the Company, there is no income tax
provision or payable in any of the periods presented. As of December 31, 1998,
the Company had approximately $6.3 million of federal tax net operating loss
carryforwards, which begin to expire in 2011. As of September 30, 1999, the
Company had approximately $37.8 million of federal tax net operating loss
carryforwards, which begin to expire in 2011. The net deferred tax asset of the
Company related to the net operating losses is approximately $141,000 and
$2.5 million, and $15.2 million, as of December 31, 1997 and 1998, and
September 30, 1999, respectively. A full valuation allowance was established
for the deferred tax asset, as realization of the tax benefit is not assured.
F-18
<PAGE>
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
Significant items giving rise to deferred tax assets and deferred tax
liabilities at December 31, 1997, 1998, and September 30, 1999, are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
September 30,
1997 1998 1999
--------- ----------- -------------
<S> <C> <C> <C>
Deferred tax assets--
Nondeductible accruals................ $ -- $ 162,374 $ 274,967
Nondeductible reserves................ -- -- 245,170
Intangible assets..................... -- -- 405,774
Other deferred tax assets............. 100 (1,553) 31,032
Net operating loss carryforwards...... 140,637 2,526,000 15,230,463
--------- ----------- ------------
Total deferred tax assets........... 140,737 2,686,821 16,187,406
Deferred tax liabilities................ -- (5,708) (1,259)
Valuation allowance..................... (140,737) (2,681,113) (16,186,147)
--------- ----------- ------------
Total net deferred tax assets
(liabilities).......................... $ -- $ -- $ --
========= =========== ============
</TABLE>
In addition, the Company's utilization of its net operating loss
carryforwards may be limited pursuant to the Tax Reform Act of 1986, due to
cumulative changes in ownership in excess of 50%, as defined.
(11) Significant Suppliers
The Company purchases a majority of its product from two suppliers. These
suppliers accounted for approximately 51% of the Company's inventory purchases
in 1998 and 60% for the nine months ended September 30, 1999. One of these
suppliers accounted for 44% of the Company's inventory purchases in 1997. The
Company has no long-term contracts or arrangements with any of its vendors that
guarantee the availability of merchandise, the continuation of particular
payment terms or the extension of credit limits. There can be no assurance that
the Company's current vendors will continue to sell merchandise to the Company
on current terms or that the Company will be able to establish new or extend
current vendor relationships to ensure acquisition of merchandise in a timely
and efficient manner and on acceptable credit terms.
(12) Related Party Transactions
The Company leases office space from a shareholder under a noncancelable
operating lease. For the years ended December 31, 1996, 1997 and 1998, rent
expense on this lease was $0, $4,000 and $41,400, respectively. For the nine
months ended September 30, 1998 and 1999, rent expense on this lease was
$26,200 and $31,700, respectively. As of December 31, 1998 and September 30,
1999, the remaining commitment under the lease was $28,400 and $9,000,
respectively, due in 1999.
The Company purchases inventory from a vendor, which is owned by a
shareholder's relative. For the years ended December 31, 1997 and 1998, the
Company purchased $8,906 and $11,255 of inventory, respectively, from the
vendor. For the nine months ended September 30, 1998 and 1999, the Company
purchased $3,886 and $83,963 of inventory, respectively, from the vendor.
F-19
<PAGE>
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
(13) Initial Public Offering
In July 1999, the Company's Board of Directors authorized management to file
a registration statement with the Securities and Exchange Commission to permit
the Company to sell shares of its common stock to the public.
Also in July 1999, the Company filed an amendment to its certificate of
incorporation increasing the number of shares of common stock into which each
share of Series C Preferred will automatically convert in connection with a
public offering of its equity securities from approximately 0.13 shares of
common stock to approximately 0.14 shares of common stock, subject to certain
conditions related to the offering. At the same time, holders of the series A
shares, series B-1 shares and series C shares agreed to automatic conversion of
their series A shares, series B-1 shares and series C shares, respectively,
into shares of the Company's common stock effective upon the closing of this
offering.
In October 1999, the Company's Board of Directors approved, subject to
stockholder approval, an amendment to the Company's certificate of
incorporation increasing the number of shares of common stock into which each
share of Series C Preferred will automatically convert in connection with a
public offering of its equity securities from approximately 0.14 shares of
common stock to approximately 0.15 shares of common stock, subject to certain
conditions related to the offering. This amendment to the Company's certificate
of incorporation also prevents any further adjustments to the number of shares
of common stock issuable upon conversion of the Series C Preferred.
Pursuant to antidilution adjustments, upon exercise of the warrant issued to
the Investment Bank for services provided in connection with the Series C
Preferred Financing, an additional 6,320 shares of common stock will be
issuable. Upon completion of the Company's initial public offering, and
assuming the Series C Preferred converts at the increased ratio, the Series A,
Series B-1 and Series C Preferred will convert into 9,055,392 shares of common
stock. Of the shares, 379,889 shares are attributable to the antidilution
provisions of the Series C Preferred and will be valued at the time of the
initial public offering. At the time of conversion, the value of the shares
attributable to the antidilution provisions will be accounted for within equity
via the accumulated deficit and additional paid-in capital accounts. Unaudited
pro forma stockholders' equity reflects the assumed conversion of the
convertible preferred stock on this basis at an assumed initial public offering
price of $12.00 per share as of September 30, 1999.
(14) Subsequent Events
1999 Stock Plan
The 1999 Stock Plan was adopted by the Board of Directors in July 1999 and
approved by the stockholders in October 1999. The 1999 Stock Plan provides for
the grant of stock-based awards to employees, officers and directors of, and
consultants or advisors to, the Company and its subsidiaries, including
incentive stock options and non-qualified stock options and other equity-based
awards. Incentive stock options may be granted only to the Company's employees.
A total of 368,485 shares of common stock may be issued upon the exercise of
options or other awards granted under the 1999 Stock Plan. The maximum number
of shares that may be granted to any employee under the 1999 Stock Plan shall
not exceed 184,242 shares of common stock during any calendar year. No options
or other equity-based awards have been granted to date under the 1999 Stock
Plan.
F-20
<PAGE>
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan was adopted by the Board of Directors
in July 1999 and approved by the stockholders in October 1999. The 1999
Employee Stock Purchase Plan provides for the issuance of a maximum of 100,496
shares of common stock.
The 1999 Employee Stock Purchase Plan is administered by the Board of
Directors and the Compensation Committee. All of the Company's employees whose
customary employment is for more than 20 hours per week and for more than three
months in any calendar year and who have completed more than 90 days of
employment with the Company on or before the first day of any six-month payment
period are eligible to participate in the 1999 Employee Stock Purchase Plan.
Outside directors and employees who would own 5% or more of the total combined
voting power of value of the Company's stock immediately after the grant may
not participate in the 1999 Employee Stock Purchase Plan. To participate in the
1999 Employee Stock Purchase Plan, an employee must authorize the Company to
deduct an amount not less than one percent nor more than 10 percent of a
participant's total cash compensation from his or her pay during six-month
payment periods. The first payment period will commence on a date to be
determined by the Board of Directors and end on December 31, 1999. Thereafter,
the payment periods will commence on the first day of January and July and end
on the last day of the following June and December, respectively of each year,
but in no case shall an employee be entitled to purchase more than 50 shares in
any one payment period. The exercise price for the option granted in each
payment period is 85% of the lesser of the average market price of the common
stock on the first or last business day of the payment period, in either event
rounded up to the nearest cent. If an employee is not a participant on the last
day of the payment period, such employee is not entitled to exercise his or her
option, and the amount of his or her accumulated payroll deductions will be
refunded. Options granted under the 1999 Employee Stock Purchase Plan may not
be transferred or assigned. An employee's rights under the 1999 Employee Stock
Purchase Plan terminate upon his or her voluntary withdrawal from the plan at
any time or upon termination of employment. No options have been granted to
date under the 1999 Employee Stock Purchase Plan.
F-21
<PAGE>
Inside back cover:
[Photograph of customer service representative talking on the phone to a
customer, with the MotherNature.com Web site home page displayed on her
computer.]
[Photographs of our order fulfillment center.]
The following text appears on the inside back cover:
"a high level of customer service is important to retaining and expanding our
customer base. To support our commitment to superior service, MotherNature.com
has invested in a new 25,000 square foot order fulfillment center. Located in
Springfield, Massachusetts, the new center lets us control the entire customer
experience, from initial contact to shipment. Our employees pick and pack
orders from our extensive on-hand inventory, enabling us to provide same-day
shipping on many popular products."
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Prospective investors may rely only on the information contained in this
prospectus. Neither MotherNature.com, Inc. nor any underwriter has authorized
anyone to provide prospective investors with different or additional
information. This prospectus is not an offer to sell nor is it seeking an
offer to buy these securities in any jurisdiction where the offer or sale is
not permitted. The information contained in this prospectus is correct only as
of the date of this prospectus, regardless of the time of the delivery of this
prospectus or any sale of these securities.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe the restrictions of that jurisdiction
related to this offering and the distribution of this prospectus.
Until , 1999 (25 days after the date of this prospectus), all dealers that
buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This requirement is in
addition to the dealer's obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
----------------------
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial Data.................................................. 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 29
Management............................................................... 46
Principal Stockholders................................................... 54
Certain Transactions..................................................... 57
Description of Securities................................................ 60
Shares Eligible for Future Sale.......................................... 64
Underwriting............................................................. 66
Legal Matters............................................................ 69
Experts.................................................................. 69
Where You Can Find More Information...................................... 69
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
MotherNature.com, Inc.
[LOGO]
4,100,000 Shares
Common Stock
----------------
PROSPECTUS
----------------
Bear, Stearns & Co. Inc.
Hambrecht & Quist
Wit Capital Corporation
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Estimated expenses, other than underwriting discounts and commissions,
payable by us in connection with the sale of the common stock being registered
under this registration statement are as follows:
<TABLE>
<S> <C>
SEC registration fee................................................. $ 17,041
NASD filing fee...................................................... 6,630
Nasdaq National Market listing fee................................... 50,000*
Printing and engraving expenses...................................... 125,000*
Legal fees and expenses.............................................. 350,000*
Accounting fees and expenses......................................... 150,000*
Blue Sky fees and expenses (including legal fees).................... 10,000*
Transfer agent and registrar fees and expenses....................... 10,000*
Miscellaneous........................................................ 31,329*
--------
Total.............................................................. $750,000*
========
</TABLE>
- --------
*Estimated
Item 14. Indemnification of Directors and Officers.
The Delaware General Corporation Law and our certificate of incorporation and
by-laws provide for indemnification of our directors and officers for
liabilities and expenses that they may incur in such capacities. In general
directors and officers are indemnified with respect to actions taken in good
faith in a manner reasonably believed to be in, or not opposed to, our best
interests and, with respect to any criminal action or proceeding, actions that
the indemnitee had no reasonable cause to believe were unlawful. Reference is
made to our certificate of incorporation and by-laws filed as Exhibits 3.1
through 3.5 to this registration statement.
The underwriting agreement provides that the underwriters are obligated,
under certain circumstances, to indemnify our directors, officers and
controlling persons against certain liabilities, including liabilities under
the Securities Act. Reference is made to the form of underwriting agreement
filed as Exhibit 1.1 to this registration statement.
In addition, we have an existing directors and officers liability insurance
policy.
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this registration statement, we
have issued the following securities that were not registered under the
Securities Act:
(a) Issuances of Capital Stock.
In June 1997, we issued and sold 414,043 shares of common stock to five
investors for an aggregate purchase price of $5.
In July 1997, we issued and sold 33,499 shares of common stock to two
investors for an aggregate purchase price of $2.
In January 1998, we issued and sold 87,097 shares of common stock to two
investors for an aggregate purchase price of $130.
In May 1998, we issued and sold $400,000 of secured convertible promissory
notes and warrants to purchase an aggregate of 34,580 shares of our common
stock at an exercise price of $2.31 per share to five
II-1
<PAGE>
investors. Pursuant to their terms, the notes converted into an aggregate of
1,290,322 shares of series A preferred stock upon the closing of the series A
convertible preferred stock financing discussed below.
In June 1998, we issued and sold an aggregate of 21,451,613 shares of series
A preferred stock at a price per share of $0.31 to seven investors. In July
1998, we issued and sold an additional 1,864,484 shares of Series A preferred
stock to nine investors.
In December 1998, we issued and sold 19,950,125 shares of series B-1
preferred stock at a price per share of $0.5213 to 13 investors. In January
1999, we issued and sold an additional 3,069,250 shares of series B-1 Preferred
Stock to one investor.
In May 1999, we issued and sold 18,409,629 shares of series C preferred stock
at a price per share of $2.2787 to 16 accredited investors. Deutsche Bank Alex.
Brown (formerly BT Alex. Brown Incorporated), served as placement agent for
this offering. As consideration for its services, we paid Deutsche Bank Alex.
Brown $750,000 and issued warrants to Deutsche Bank Alex. Brown to purchase
18,376 shares of our common stock as described in (b) below. Pursuant to
antidilution adjustments, an additional 6,320 shares of common stock will be
issuable under the warrant.
In September 1999, we issued and sold 974,044 shares of common stock to
Rodale Inc., a qualified institutional buyer. In exchange for the shares,
Rodale agreed to provide us with rights to the electronic versions of certain
of its publications and certain joint marketing activities in accordance with a
Content License and Marketing Agreement. Based upon the value of the assets
received, the aggregate value of the shares at the close of the transaction was
approximately $16.8 million or $17.23 per share.
No underwriters were used in the foregoing transactions. All sales of
securities described above were made in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act (and/or Regulation
D promulgated thereunder) for transactions by an issuer not involving a public
offering.
(b) Issuances of Notes and Warrants.
In April 1998, we issued warrants to two investors to purchase an aggregate
of 40,199 shares of our common stock at an exercise price of $.07 per share in
consideration for one investor's services as an employee and the other
investor's services as a consultant.
In May 1998, we issued warrants to four investors to purchase an aggregate of
34,580 shares of our common stock at an exercise price of $2.31 per share in
consideration for their lending us $400,000 as described in (a) above.
In December 1998, we issued warrants to our subordinated lender to purchase
an aggregate of 66,359 shares of common stock at an exercise price of $3.75 per
share in consideration of the lender entering into subordinated loan and lease
financing agreements with us.
In December 1998, we granted our subordinated lender the right, on one
occasion only, to convert up to 30% of the original aggregate principal amount
of all advances under our subordinated loan agreement with the lender into
shares of common stock at an exercise price of $3.73 per share.
In May 1999, we issued a warrant to Deutsche Bank Alex. Brown (formerly BT
Alex. Brown Incorporated) to purchase an aggregate of 18,376 shares of our
common stock at an exercise price per share of $16.38 in consideration of
Deutsche Bank Alex. Brown's services as the placement agent for the shares of
series C preferred stock offered in May 1999 as described in (a) above.
Pursuant to antidilution adjustments, an additional 6,320 shares of common
stock will be issuable under the warrant.
In June 1999, we issued a warrant to one investor to purchase up to an
aggregate of 804 shares of our common stock at an exercise price per share of
$18.65 in consideration for entering into a real estate lease with us.
II-2
<PAGE>
No underwriters were used in the foregoing transactions. All sales of
securities described above were made in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act (and/or Regulation
D promulgated thereunder) for transactions by an issuer not involving a public
offering.
(c) Grants and Exercises of Stock Options.
Since June 30, 1996, we have granted stock options to purchase 2,124,870
shares of common stock with exercise prices ranging from $.22 to $22.39 per
share, to employees, directors and consultants pursuant to our 1998 Stock Plan.
Of these options, 268,253 have been exercised for an aggregate consideration of
$69,734 as of September 30, 1999. The issuance of common stock upon exercise of
the options was exempt either pursuant to Rule 701, as a transaction pursuant
to a compensatory benefit plan, or pursuant to Section 4(2), as a transaction
by an issuer not involving a public offering.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation, as amended, of the Registrant
(currently in effect).
3.2 Form of Certificate of Amendment to Certificate of Incorporation
of the Registrant (to be filed upon the effectiveness of the
registration statement).
3.3 Form of First Amended and Restated Certificate of Incorporation of
the Registrant (to be filed upon the closing of the offering).
3.4** By-laws of the Registrant (currently in effect).
3.5 Form of Amended and Restated By-laws of the Registrant (to take
effect as of the effective date of the registration statement).
4.1 Specimen Certificate for shares of the Registrant's Common Stock.
4.2** Description of Capital Stock (contained in the Certificate of
Incorporation filed as Exhibits 3.1 through 3.3).
5.1 Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
10.1+** 1998 Stock Plan.
10.2+ 1999 Stock Plan.
10.3+ 1999 Employee Stock Purchase Plan.
10.4 Content License and Marketing Agreement between Rodale Inc. and
the Registrant, dated September 17, 1999; Schedule A to the
Content License and Marketing Agreement between Rodale Inc. and
the Registrant, dated September 17, 1999; and the Purchase
Agreement between Rodale Inc. and the Registrant, dated September
17, 1999.
10.5** Sublease Agreement between Prevision Marketing, Inc. and the
Registrant, dated March 26, 1999, including the Lease between New
England Farms Limited Partnership and Prevision Marketing, Inc.,
dated October 25, 1996, as amended by an Amendment to Lease and
Consent to Sublease, dated March 30, 1999.
10.6** Lease Agreement between Carl E. Breyer, Jr., Raymond P. Pieczarka
and Stephen Spinelli, Jr., Trustees of Park Place Brookdale Realty
Trust, and the Registrant, dated June 18, 1999.
10.7** Lease between Rosemary Nicholson, Trustee of Padala Realty Trust,
and the Registrant, dated June 11, 1998.
10.8** Commercial Lease between Charles W. Ollard and the Registrant,
dated May 1, 1998, including an Addendum to Commercial Lease,
dated May 1, 1998.
10.9** Commercial Lease between Paul A. Bunn and the Registrant, dated
June 30, 1999.
10.10** Second Amended and Restated Registration Rights Agreement dated as
of May 12, 1999 as amended on September 17, 1999.
10.11** Letter agreement between the Company and Ross A. Love dated August
7, 1998.
10.12+** Employment Agreement between Michael Barach and the Registrant,
dated September 1999.
11.1** Statement re: Computation of Per Share Earnings.
23.1 Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit
5.1).
23.2 Consent of Arthur Andersen LLP.
23.3** Consent of Placido Corpora.
24.1** Power of Attorney (contained on page II-6).
27.1** Financial Data Schedule.
99.1 Report of Arthur Andersen LLP with respect to Financial Data
Schedule.
</TABLE>
- --------
*To be filed by amendment.
+Indicates a management contract or any compensatory plan, contract or
arrangement.
**Previously filed.
(b) Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts
II-4
<PAGE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by 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
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective; and (3) that for the purpose of determining
any liability under the Securities Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Concord, Massachusetts
on November 4, 1999.
MOTHERNATURE.COM, INC.
By: /s/ Michael I. Barach
-------------------------------------
Michael I. Barach
President, Chief Executive
Officer and Director
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by the following persons in
the capacities indicated below:
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ Michael I. Barach President, Chief Executive November 4, 1999
______________________________________ Officer and Director
Michael I. Barach
* Chief Financial Officer, November 4, 1999
______________________________________ Treasurer and Secretary
Michael L. Bayer
* Director November 4, 1999
______________________________________
Michael A. Greeley
* Director November 4, 1999
______________________________________
Keith M. Kerman
* Director November 4, 1999
______________________________________
Brent R. Knudsen
* Director November 4, 1999
______________________________________
Jason G. Olim
* Director November 4, 1999
______________________________________
Marc D. Poirier
</TABLE>
By: /s/ Michael I. Barach
-------------------------
Michael I. Barach
Attorney-in-Fact
<PAGE>
MotherNature.com, Inc.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance
Balance at Additions at End
Beginning Charged to of
of Period Expense Deductions Period
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Reserve for returns, allowances
and other:
For the nine months ended
September 30, 1999.............. $-- $22,621 $-- $22,621
For the years ended December 31,
1998............................ -- -- -- --
1997............................ -- -- -- --
1996............................ -- -- -- --
</TABLE>
S-1
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation, as amended, of the Registrant
(currently in effect).
3.2 Form of Certificate of Amendment to Certificate of Incorporation
of the Registrant (to be filed upon the effectiveness of the
registration statement).
3.3 Form of First Amended and Restated Certificate of Incorporation of
the Registrant (to be filed upon the closing of the offering).
3.4** By-laws of the Registrant (currently in effect).
3.5 Form of Amended and Restated By-laws of the Registrant (to take
effect as of the effective date of the registration statement).
4.1 Specimen Certificate for shares of the Registrant's Common Stock.
4.2** Description of Capital Stock (contained in the Certificate of
Incorporation filed as Exhibits 3.1 through 3.3).
5.1 Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
10.1+** 1998 Stock Plan.
10.2+ 1999 Stock Plan.
10.3+ 1999 Employee Stock Purchase Plan.
10.4 Content License and Marketing Agreement between Rodale Inc. and
the Registrant, dated September 17, 1999; Schedule A to the
Content License and Marketing Agreement between Rodale Inc. and
the Registrant, dated September 17, 1999; and the Purchase
Agreement between Rodale Inc. and the Registrant, dated September
17, 1999.
10.5** Sublease Agreement between Prevision Marketing, Inc. and the
Registrant, dated March 26, 1999, including the Lease between New
England Farms Limited Partnership and Prevision Marketing, Inc.,
dated October 25, 1996, as amended by an Amendment to Lease and
Consent to Sublease, dated March 30, 1999.
10.6** Lease Agreement between Carl E. Breyer, Jr., Raymond P. Pieczarka
and Stephen Spinelli, Jr., Trustees of Park Place Brookdale Realty
Trust, and the Registrant, dated June 18, 1999.
10.7** Lease between Rosemary Nicholson, Trustee of Padala Realty Trust,
and the Registrant, dated June 11, 1998.
10.8** Commercial Lease between Charles W. Ollard and the Registrant,
dated May 1, 1998, including an Addendum to Commercial Lease,
dated May 1, 1998.
10.9** Commercial Lease between Paul A. Bunn and the Registrant, dated
June 30, 1999.
10.10** Second Amended and Restated Registration Rights Agreement dated as
of May 12, 1999 as amended September 17, 1999.
10.11** Letter agreement between the Company and Ross A. Love dated August
7, 1998.
10.12+** Employment Agreement between Michael Barach and the Registrant,
dated September 1999.
11.1** Statement re: Computation of Per Share Earnings.
23.1 Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit
5.1).
23.2 Consent of Arthur Andersen LLP.
23.3** Consent of Placido Corpora.
24.1** Power of Attorney (contained on page II-6).
27.1** Financial Data Schedule.
99.1 Report of Arthur Andersen LLP with respect to Financial Data
Schedule.
</TABLE>
- --------
*To be filed by amendment.
+Indicates a management contract or any compensatory plan, contract or
arrangement.
**Previously filed.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
MOTHER NATURE'S GENERAL STORE, INC.
* * * * * *
FIRST. The name of the corporation is Mother Nature's General Store,
Inc. (the "Corporation").
SECOND. The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, New Castle
County, Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD. 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 General Corporation Law of the State of
Delaware.
FOURTH. The total number of shares of all classes of capital stock which
the Corporation shall have authority to issue is 87,490,000, consisting of
40,000,000 shares of Common Stock, par value $.01 per share (the "Common
Stock"), and47,490,000 shares of Preferred Stock, par value $.01 per share
("Preferred Stock"), of which 23,745,000 shares shall be designated Series A
Convertible Preferred Stock (the "Series A Convertible Preferred Stock") and
23,745,000 shares shall be undesignated Preferred Stock (the "Undesignated
Preferred Stock").
The Undesignated Preferred Stock may be designated and issued in one or
more series by action of the Board of Directors with such rights, designations
and preferences set forth in paragraph A.8 of this Certificate of Incorporation
and may only be issued pursuant to paragraph A.8. Each series of Preferred Stock
shall be so designated as to distinguish the shares thereof from the shares of
all other series and classes.
A. SERIES A CONVERTIBLE PREFERRED STOCK
1. Number of Shares. The series of Preferred Stock designated and known as
----------------
"Series A Convertible Preferred Stock" shall consist of 23,745,000 shares.
2. Voting.
------
2A. General. Except as may be otherwise provided in this Certificate of
-------
Incorporation or by law, the Series A Convertible Preferred Stock shall vote
together with all other classes and series of stock of the Corporation as a
single class on all actions to be taken by the stockholders of the Corporation,
including, but not limited to actions amending the Certificate of Incorporation
of the Corporation to increase the number of authorized shares of
<PAGE>
-2-
Common Stock. Each share of Series A Convertible Preferred Stock shall entitle
the holder thereof to such number of votes per share on each such action as
shall equal the number of shares of Common Stock (including fractions of a
share) into which each share of Series A Convertible Preferred Stock is then
convertible.
2B. Board Size. For so long as at least 50% of the shares of Series A
----------
Convertible Preferred Stock issued pursuant to that certain Series A Convertible
Preferred Stock Purchase Agreement dated as of June 10, 1998 by and between the
Corporation and the other parties named therein (the "Purchase Agreement")
remain outstanding (including any shares of Undesignated Preferred Stock issued
pursuant to paragraph 8) (appropriately adjusted to reflect any stock split,
stock dividend or otherwise with respect to the Series A Convertible Preferred
Stock), the Corporation shall not, without the written consent or affirmative
vote of the holders of greater than fifty percent (50%) of the then outstanding
shares of Series A Convertible Preferred Stock (including any shares of
Undesignated Preferred Stock issued pursuant to paragraph 8), given in writing
or by vote at a meeting, consenting or voting (as the case may be) separately as
a series, increase the maximum number of directors constituting the Board of
Directors to a number in excess of seven (7).
2C. Board Seats. For only so long as at least 75% of the shares of
-----------
Series A Convertible Preferred Stock issued pursuant to the Purchase Agreement
remain outstanding (including any shares of Undesignated Preferred Stock issued
pursuant to paragraph 8) (appropriately adjusted to reflect any stock split,
stock dividend or otherwise with respect to the Series A Convertible Preferred
Stock), the holders of the Series A Convertible Preferred Stock (including any
shares of Undesignated Preferred Stock issued pursuant to paragraph 8), voting
as a separate series, shall be entitled to elect four (4) directors of the
Corporation. The holders of the Common Stock, voting as a separate class, shall
be entitled to elect all of the remaining directors of the Corporation. At any
meeting (or in a written consent in lieu thereof) held for the purpose of
electing directors, the presence in person or by proxy (or the written consent)
of the holders of a majority of the shares of Series A Convertible Preferred
Stock then outstanding (including any shares of Undesignated Preferred Stock
issued pursuant to paragraph 8) shall constitute a quorum of the Series A
Convertible Preferred Stock for the election of directors to be elected solely
by the holders of the Series A Convertible Preferred Stock. A vacancy in any
directorship elected by the holders of the Series A Convertible Preferred Stock
shall be filled only by vote or written consent of the holders of the Series A
Convertible Preferred Stock (including any shares of Undesignated Preferred
Stock issued pursuant to paragraph 8), and a vacancy in any directorship elected
by the holders of the Common Stock shall be filled only by vote or written
consent of the holders of the Common Stock.
3. Dividends. The holders of the Series A Convertible Preferred Stock shall
---------
be entitled to receive, out of funds legally available therefor, when and if
declared by the Board of Directors, quarterly dividends at the rate per annum of
$.0186 per share (the "Series A Dividends"). The Series A Dividends shall not
be cumulative. No dividends shall be declared with respect to the Series A
Convertible Preferred Stock unless and solely to the extent that the same
dividend (on an as-converted basis) is declared with respect to the Common
Stock; provided, however, that the Corporation shall pay any such dividends in
-------- -------
full first to the holders of the Series A Convertible Preferred Stock before any
such dividends are paid to the holders of Common Stock.
<PAGE>
-3-
4. Liquidation. Upon any liquidation, dissolution or winding up of the
-----------
Corporation, whether voluntary or involuntary, distributions to the stockholders
of the Corporation shall be made in the following manner:
4A. The holders of the shares of Series A Convertible Preferred Stock
shall first be entitled, before any distribution or payment is made upon any
stock ranking on liquidation junior to the Series A Convertible Preferred Stock,
to be paid an amount equal to $0.31 per share plus, in the case of each share,
an amount equal to all Series A Dividends declared but unpaid thereon and any
other dividends declared but unpaid thereon, computed to the date payment
thereof is made available, such amount payable with respect to one share of
Series A Convertible Preferred Stock being sometimes referred to as the
"Liquidation Preference Payment" and with respect to all shares of Series A
Convertible Preferred Stock being sometimes referred to as the "Liquidation
Preference Payments". If upon such liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the assets to be distributed
among the holders of Series A Convertible Preferred Stock shall be insufficient
to permit payment in full to the holders of Series A Convertible Preferred Stock
of the Liquidation Preference Payments, then the entire assets of the
Corporation to be so distributed shall be distributed ratably among the holders
of Series A Convertible Preferred Stock.
4B. Upon any such liquidation, dissolution or winding up of the
Corporation, immediately after the holders of Series A Convertible Preferred
Stock shall have been paid in full the Liquidation Preference Payments set forth
in subparagraph 4A above, the remaining net assets of the Corporation available
for distribution shall be distributed ratably among the holders of Series A
Convertible Preferred Stock and Common Stock (with each share of Series A
Convertible Preferred Stock being deemed, for such purpose, to be equal to the
number of shares of Common Stock (including fractions of a share) into which
such share of Series A Convertible Preferred Stock is convertible immediately
prior to the close of business on the business day fixed for such distribution);
provided that after the holders of Series A Convertible Preferred Stock have
received total distributions equal to $2.17 per share pursuant to this
subparagraph 4B (as adjusted for stock splits and the like), there shall be no
further distributions to the holders of the Series A Convertible Preferred Stock
and all then-remaining assets of the Corporation shall be distributed to the
holders of Common Stock. Nothing contained herein, however, shall limit the
right of the holders of the Series A Convertible Preferred Stock to elect to
convert their shares of Series A Convertible Preferred Stock into shares Common
Stock pursuant to subparagraph 6A hereof.
4C. Written notice of any such liquidation, dissolution or winding up,
stating a payment date, the amount of the Liquidation Preference Payments and
the place where said Liquidation Preference Payments shall be payable, shall be
delivered in person, mailed by certified or registered mail, return receipt
requested, or sent by telecopier or telex, not less than 20 days prior to the
payment date stated therein, to the holders of record of Series A Convertible
Preferred Stock, such notice to be addressed to each such holder at its address
as shown by the records of the Corporation. The consolidation or merger of the
Corporation into or with any other entity or entities which results in the
exchange of outstanding shares of the Corporation for securities or other
consideration issued or paid or caused to be issued or paid by any such entity
<PAGE>
-4-
or affiliate thereof (other than a merger to reincorporate the Corporation in a
different jurisdiction), and the sale, lease, abandonment, transfer or other
disposition by the Corporation of all or substantially all its assets, shall be
deemed to be a liquidation, dissolution or winding up of the Corporation within
the meaning of the provisions of this paragraph 4. For purposes hereof, the
Common Stock shall rank on liquidation junior to the Series A Convertible
Preferred Stock. Whenever the distribution provided for in this paragraph 4
shall be payable in property other than cash, the value of such distribution
shall be the fair market value of such property as determined in good faith by
the Board of Directors of the Corporation.
5. Restrictions. For so long as at least 50% of the shares of Series A
------------
Convertible Preferred Stock issued pursuant to the Purchase Agreement remain
outstanding (including any shares of Undesignated Preferred Stock issued
pursuant to paragraph 8) (appropriately adjusted to reflect any stock split,
stock dividend or otherwise with respect to the Series A Convertible Preferred
Stock), except where the vote or written consent of the holders of a greater
number of shares of the Corporation is required by law or by the Certificate of
Incorporation, and in addition to any other vote required by law or this
Certificate of Incorporation, without the approval of the holders of greater
than fifty percent (50%) of the then outstanding shares of Series A Convertible
Preferred Stock (including any shares of Undesignated Preferred Stock issued
pursuant to paragraph 8), given in writing or by vote at a meeting, consenting
or voting (as the case may be) separately as a series, the Corporation will not:
5A. Create or authorize the creation of any additional class or series
of shares of stock unless the same ranks junior to the Series A Convertible
Preferred Stock as to the distribution of assets on the liquidation, dissolution
or winding up of the Corporation, or increase the authorized amount of the
Series A Convertible Preferred Stock or increase the authorized amount of any
additional class or series of shares of stock unless the same ranks junior to
the Series A Convertible Preferred Stock as to the distribution of assets on the
liquidation, dissolution or winding up of the Corporation, or create or
authorize any obligation or security convertible into shares of Series A
Convertible Preferred Stock or into shares of any other class or series of stock
unless the same ranks junior to the Series A Convertible Preferred Stock as to
the distribution of assets on the liquidation, dissolution or winding up of the
Corporation, whether any such creation, authorization or increase shall be by
means of amendment to the Certificate of Incorporation or by merger,
consolidation or otherwise;
5B. Consent to any liquidation, dissolution or winding up of the
Corporation or consolidate or merge into or with any other entity or entities or
sell, lease, abandon, transfer or otherwise dispose of all or substantially all
its assets;
5C. Amend, alter or repeal its Certificate of Incorporation if the
effect would be materially adverse in any manner with respect to the rights of
the holders of the Series A Convertible Preferred Stock hereunder;
5D. Purchase or set aside any sums for the purchase of, or pay any
dividend or make any distribution on, any shares of stock other than the Series
A Convertible Preferred Stock, except for dividends or other distributions
payable on the Common Stock solely in the form of additional shares of Common
Stock and except for the purchase of shares of Common
<PAGE>
-5-
Stock (i) pursuant to the terms of that certain Stockholders Agreement dated as
of June 10, 1998 (the "Stockholders Agreement") by and between the Corporation
and the other parties named therein, or (ii) from former employees of the
Corporation, if each such purchase is made pursuant to contractual rights held
by the Corporation relating to the termination of employment of such former
employee and the purchase price does not exceed the original issue price paid by
such former employee to the Corporation for such shares; or
5E. Redeem or otherwise acquire any shares of Series A Convertible
Preferred Stock except pursuant to the Stockholders Agreement or pursuant to a
purchase offer made pro rata to all holders of the shares of Series A
Convertible Preferred Stock on the basis of the aggregate number of outstanding
shares of Series A Convertible Preferred Stock then held by each such holder.
Notwithstanding anything herein to the contrary, the provisions of this
paragraph 5 shall not apply to the creation of a series of Preferred Stock in
accordance with the provisions of paragraph 8 hereof;
6. Conversions. The holders of shares of Series A Convertible Preferred
-----------
Stock shall have the following conversion rights:
6A. Right to Convert. Subject to the terms and conditions of this
----------------
paragraph 6, the holder of any share or shares of Series A Convertible Preferred
Stock shall have the right, at its option at any time, to convert any of such
shares of Series A Convertible Preferred Stock (except that upon any liquidation
of the Corporation the right of conversion shall terminate at the close of
business on the business day fixed for payment of the amount distributable on
the Series A Convertible Preferred Stock) into such number of fully paid and
nonassessable shares of Common Stock as is obtained by (i) multiplying the
number of shares of Series A Convertible Preferred Stock so to be converted by
$0.31 and (ii) dividing the result by the conversion price of $0.31 per share
or, in case an adjustment of such price has taken place pursuant to the further
provisions of this paragraph 6, then by the conversion price as last adjusted
and in effect at the date any share or shares of Series A Convertible Preferred
Stock are surrendered for conversion (such price, or such price as last
adjusted, being referred to as the "Conversion Price"). Such rights of
conversion shall be exercised by the holder thereof by giving written notice
that the holder elects to convert all of the shares of Series A Convertible
Preferred Stock held by such holder into Common Stock and by surrender of a
certificate or certificates for the shares so to be converted to the Corporation
at its principal office (or such other office or agency of the Corporation as
the Corporation may designate by notice in writing to the holders of the Series
A Convertible Preferred Stock) at any time during its usual business hours on
the date set forth in such notice, together with a statement of the name or
names (with address) in which the certificate or certificates for shares of
Common Stock shall be issued.
6B. Issuance of Certificates; Time Conversion Effected. Promptly after
--------------------------------------------------
the receipt of the written notice referred to in subparagraph 6A and surrender
of the certificate or certificates for the share or shares of Series A
Convertible Preferred Stock to be converted, the Corporation shall issue and
deliver, or cause to be issued and delivered, to the holder, registered in such
name or names as such holder may direct, a certificate or certificates for the
number of whole shares of
<PAGE>
-6-
Common Stock issuable upon the conversion of such share or shares of Series A
Convertible Preferred Stock. To the extent permitted by law, such conversion
shall be deemed to have been effected and the Conversion Price shall be
determined as of the close of business on the date on which such written notice
shall have been received by the Corporation and the certificate or certificates
for such share or shares shall have been surrendered as aforesaid, and at such
time the rights of the holder of such share or shares of Series A Convertible
Preferred Stock shall cease, and the person or persons in whose name or names
any certificate or certificates for shares of Common Stock shall be issuable
upon such conversion shall be deemed to have become the holder or holders of
record of the shares represented thereby.
6C. Fractional Shares; Dividends; Partial Conversion. No fractional
------------------------------------------------
shares shall be issued upon conversion of Series A Convertible Preferred Stock
into Common Stock and no payment or adjustment shall be made upon any conversion
on account of any cash dividends on the Common Stock issued upon such
conversion. At the time of each conversion, the Corporation shall pay in cash
an amount equal to all dividends, excluding Series A Dividends, accrued and
unpaid on the shares of Series A Convertible Preferred Stock surrendered for
conversion to the date upon which such conversion is deemed to take place as
provided in subparagraph 6B. In case the number of shares of Series A
Convertible Preferred Stock represented by the certificate or certificates
surrendered pursuant to subparagraph 6A exceeds the number of shares converted,
the Corporation shall, upon such conversion, execute and deliver to the holder,
at the expense of the Corporation, a new certificate or certificates for the
number of shares of Series A Convertible Preferred Stock represented by the
certificate or certificates surrendered which are not to be converted. If any
fractional share of Common Stock would, except for the provisions of the first
sentence of this subparagraph 6C, be delivered upon such conversion, the
Corporation, in lieu of delivering such fractional share, shall pay to the
holder surrendering the Series A Convertible Preferred Stock for conversion an
amount in cash equal to the current market price of such fractional share as
determined in good faith by the Board of Directors of the Corporation.
6D. Adjustment of Price Upon Issuance of Common Stock. Except as
-------------------------------------------------
provided in subparagraph 6E and subject to paragraph 8 hereof, if and whenever
the Corporation shall issue or sell, or is, in accordance with subparagraphs
6D(1) through 6D(7), deemed to have issued or sold, any shares of Common Stock
for a consideration per share less than the Conversion Price in effect
immediately prior to the time of such issue or sale, then, forthwith upon such
issue or sale, the Conversion Price shall be reduced to the price determined by
dividing (i) an amount equal to the sum of (a) the number of shares of Common
Stock outstanding immediately prior to such issue or sale multiplied by the then
existing Conversion Price and (b) the consideration, if any, received by the
Corporation upon such issue or sale, by (ii) the total number of shares of
Common Stock outstanding immediately after such issue or sale; provided,
--------
however, that, for the purpose of this subparagraph 6D, all shares of Common
- -------
Stock issuable upon conversion of shares of Series A Convertible Preferred Stock
outstanding immediately prior to such issue shall be deemed to be outstanding,
and immediately after any additional shares of Common Stock are deemed issued
pursuant to subparagraph 6D(1) or 6D(2) (and notwithstanding the provisions of
subparagraph 6E), such additional shares of Common Stock shall be deemed to be
outstanding.
<PAGE>
-7-
For purposes of this subparagraph 6D, the following subparagraphs 6D(1) to
6D(7) shall also be applicable:
6D(1) Issuance of Rights or Options. In case at any time the
-----------------------------
Corporation shall in any manner grant (whether directly or by assumption in a
merger or otherwise) any warrants or other rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such warrants,
rights or options being called "Options" and such convertible or exchangeable
stock or securities being called "Convertible Securities") whether or not
such Options or the right to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for which
Common Stock is issuable upon the exercise of such Options or upon the
conversion or exchange of such Convertible Securities (determined by dividing
(i) the total amount, if any, received or receivable by the Corporation as
consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Corporation upon the
exercise of all such Options, plus, in the case of such Options which relate
to Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options) shall be less than the Conversion
Price in effect immediately prior to the time of the granting of such
Options, then the total maximum number of shares of Common Stock issuable
upon the exercise of such Options or upon conversion or exchange of the total
maximum amount of such Convertible Securities issuable upon the exercise of
such Options shall be deemed to have been issued for such price per share as
of the date of granting of such Options or the issuance of such Convertible
Securities and thereafter shall be deemed to be outstanding. Except as
otherwise provided in subparagraph 6D(3), no adjustment of the Conversion
Price shall be made upon the actual issue of such Common Stock or of such
Convertible Securities upon exercise of such Options or upon the actual issue
of such Common Stock upon conversion or exchange of such Convertible
Securities.
6D(2) Issuance of Convertible Securities. In case the Corporation
----------------------------------
shall in any manner issue (whether directly or by assumption in a merger or
otherwise) or sell any Convertible Securities, whether or not the rights to
exchange or convert any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon
such conversion or exchange (determined by dividing (i) the total amount
received or receivable by the Corporation as consideration for the issue or
sale of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof, by (ii) the total maximum number of shares of
Common Stock issuable upon the conversion or exchange of all such Convertible
Securities) shall be less than the Conversion Price in effect immediately
prior to the time of such issue or sale, then the total maximum number of
shares of Common Stock issuable upon conversion or exchange of all such
Convertible Securities shall be deemed to have been issued for such price per
share as of the date of the issue or sale of such Convertible Securities and
thereafter shall be deemed to be
<PAGE>
-8-
outstanding, provided that (a) except as otherwise provided in subparagraph
6D(3), no adjustment of the Conversion Price shall be made upon the actual
issue of such Common Stock upon conversion or exchange of such Convertible
Securities and (b) if any such issue or sale of such Convertible Securities
is made upon exercise of any Options to purchase any such Convertible
Securities for which adjustments of the Conversion Price have been or are to
be made pursuant to other provisions of this subparagraph 6D, no further
adjustment of the Conversion Price shall be made by reason of such issue or
sale.
6D(3) Change in Option Price or Conversion Rate. Upon the
-----------------------------------------
happening of any of the following events, namely, if the purchase price
provided for in any Option referred to in subparagraph 6D(1), the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraph 6D(1) or 6D(2), or the
rate at which Convertible Securities referred to in subparagraph 6D(1) or
6D(2) are convertible into or exchangeable for Common Stock shall change at
any time (including, but not limited to, changes under or by reason of
provisions designed to protect against dilution), the Conversion Price in
effect at the time of such event shall forthwith be readjusted to the
Conversion Price which would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such changed
purchase price, additional consideration or conversion rate, as the case may
be, at the time initially granted, issued or sold; and on the termination of
any such Option or any such right to convert or exchange such Convertible
Securities, the Conversion Price then in effect hereunder shall forthwith be
increased to the Conversion Price which would have been in effect at the time
of such termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such termination, never been issued.
6D(4) Stock Dividends. In case the Corporation shall declare a
---------------
dividend or make any other distribution upon any stock of the Corporation
(other than the Common Stock) payable in Common Stock, Options or Convertible
Securities, then any Common Stock, Options or Convertible Securities, as the
case may be, issuable in payment of such dividend or distribution shall be
deemed to have been issued or sold without consideration.
6D(5) Consideration for Stock. In case any shares of Common Stock,
-----------------------
Options or Convertible Securities 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 allowed by
the Corporation in connection therewith. In case any shares of Common Stock,
Options or Convertible Securities 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 of the Corporation,
without deduction of any expenses 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 of
the Corporation.
<PAGE>
-9-
6D(6) Record Date. In case the Corporation shall take a record of
-----------
the holders of its Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock, Options or
Convertible Securities or (ii) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such record date shall be deemed to
be the date of the issue or sale of the shares of Common Stock deemed to have
been issued or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
6D(7) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or
for the account of the Corporation, and the disposition of any such shares
shall be considered an issue or sale of Common Stock for the purpose of this
subparagraph 6D.
6E. Certain Issues of Common Stock Excepted. Anything herein to the
---------------------------------------
contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Conversion Price in the case of the issuance from and after
the date of filing of these terms of the Series A Convertible Preferred Stock of
(i) shares of Common Stock (or options to purchase such shares) pursuant to
agreements or plans adopted by the Board of Directors of the Corporation to
directors, officers, employees or consultants of the Corporation in connection
with their service as directors of the Corporation, their employment by the
Corporation or their retention as consultants by the Corporation, (ii) shares of
Common Stock issued upon the exercise of Common Stock Purchase Warrants
outstanding as of the date of the initial issuance of the Series A Convertible
Preferred Stock, (iii) solely in consideration for the acquisition (whether by
merger or otherwise) by the Corporation or any of its subsidiaries of all or
substantially all of the stock or assets of any other entity, (iv) shares of
capital stock, or options or warrants therefor, to be issued subject to the
approval of the Corporation's Board of Directors to equipment leasing
organizations in connection with equipment leasing arrangements to which the
Corporation is or shall become a party, and (v) shares of any series Preferred
Stock issued pursuant to paragraph 8 hereof.
6F. Subdivision or Combination of Common Stock. In case the Corporation
------------------------------------------
shall at any time subdivide (by any stock split, stock dividend or otherwise)
its outstanding shares of Common Stock into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision shall be
proportionately reduced, and, conversely, in case the outstanding shares of
Common Stock shall be combined into a smaller number of shares, the Conversion
Price in effect immediately prior to such combination shall be proportionately
increased. In the case of any such subdivision, no further adjustment shall be
made pursuant to subparagraph 6D(4) by reason thereof.
6G. Reorganization or Reclassification. If any capital reorganization,
----------------------------------
reclassification, recapitalization, consolidation, merger, sale of all or
substantially all of the Corporation's assets or other similar transaction (any
such transaction being referred to herein as an "Organic Change") shall be
effected in such a way that holders of Common Stock shall be entitled to receive
(either directly or upon subsequent liquidation) stock, securities or assets
with
<PAGE>
-10-
respect to or in exchange for Common Stock, then, as a condition of such Organic
Change, lawful and adequate provisions shall be made whereby each holder of a
share or shares of Series A Convertible Preferred Stock shall thereupon have the
right to receive, upon the basis and upon the terms and conditions specified
herein and in lieu of or in addition to, as the case may be, the shares of
Common Stock immediately theretofore receivable upon the conversion of such
share or shares of Series A Convertible Preferred Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of such Common Stock equal to the number of
shares of such Common Stock immediately theretofore receivable upon such
conversion had such Organic Change not taken place, and in any case of a
reorganization or reclassification only appropriate provisions shall be made
with respect to the rights and interests of such holder to the end that the
provisions hereof (including without limitation provisions for adjustments of
the Conversion Price) shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise of such conversion rights.
6H. [Reserved].
6I. Notice of Adjustment. Upon any adjustment of the Conversion Price,
--------------------
then and in each such case the Corporation shall give written notice thereof, by
delivery in person, certified or registered mail, return receipt requested,
telecopier or telex, addressed to each holder of shares of Series A Convertible
Preferred Stock at the address of such holder as shown on the books of the
Corporation, which notice shall state the Conversion Price resulting from such
adjustment, setting forth in reasonable detail the method upon which such
calculation is based.
6J. Other Notices. In case at any time:
-------------
(1) the Corporation shall declare any dividend upon its Common Stock
payable in cash or stock or make any other distribution to the holders of its
Common Stock;
(2) the Corporation shall offer for subscription pro rata to the
--- ----
holders of its Common Stock any additional shares of stock of any class or
other rights;
(3) there shall be any capital reorganization or reclassification of
the capital stock of the Corporation, or a consolidation or merger of the
Corporation with or into another entity or entities, or a sale, lease,
abandonment, transfer or other disposition of all or substantially all its
assets; or
(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier or
telex, addressed to each holder of any shares of Series A Convertible Preferred
Stock at the address of such holder as shown on the books of the Corporation,
(a) at least 20 days' prior written notice of the date on which the books of the
Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such reorganization,
<PAGE>
-11-
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, disposition, dissolution, liquidation or winding up, at
least 20 days' prior written notice of the date when the same shall take place.
Such notice in accordance with the foregoing clause (a) shall also specify, in
the case of any such dividend, distribution or subscription rights, the date on
which the holders of Common Stock shall be entitled thereto and such notice in
accordance with the foregoing clause (b) shall also specify the date on which
the holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding up, as the case may be.
6K. Stock to be Reserved. The Corporation will at all times reserve and
--------------------
keep available out of its authorized Common Stock, solely for the purpose of
issuance upon the conversion of Series A Convertible Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Series A Convertible Preferred
Stock. The Corporation covenants that all shares of Common Stock which shall be
so issued shall be duly and validly issued and fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issue thereof, and,
without limiting the generality of the foregoing, the Corporation covenants that
it will from time to time take all such action as may be requisite to assure
that the par value per share of the Common Stock is at all times equal to or
less than the Conversion Price in effect at the time. The Corporation will take
all such action as may be necessary to assure that all such shares of Common
Stock may be so issued without violation of any applicable law or regulation, or
of any requirement of any national securities exchange upon which the Common
Stock may be listed.
6L. No Reissuance of Series A Convertible Preferred Stock. Shares of
-----------------------------------------------------
Series A Convertible Preferred Stock which are converted into shares of Common
Stock as provided herein shall not be reissued.
6M. Issue Tax. The issuance of certificates for shares of Common Stock
---------
upon conversion of Series A Convertible Preferred Stock 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 the Series A Convertible
Preferred Stock which is being converted.
6N. Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any Series A Convertible Preferred Stock
or of any shares of Common Stock issued or issuable upon the conversion of any
shares of Series A Convertible Preferred Stock in any manner which interferes
with the timely conversion of such Series A Convertible Preferred Stock, except
as may otherwise be required to comply with applicable securities laws.
6O. Definition of Common Stock. As used in this paragraph 6, the term
--------------------------
"Common Stock" shall mean and include the Corporation's authorized Common Stock,
par value $0.01 per share, as constituted on the date of filing of these terms
of the Series A Convertible Preferred Stock, and shall also include any capital
stock of any class of the Corporation thereafter author-
<PAGE>
-12-
ized which shall not be limited to a fixed sum or percentage in respect of the
rights of the holders thereof to participate in dividends or in the distribution
of assets upon the voluntary or involuntary liquidation, dissolution or winding
up of the Corporation; provided that the shares of Common Stock receivable upon
conversion of shares of Series A Convertible Preferred Stock shall include only
shares designated as Common Stock of the Corporation on the date of filing of
this instrument, or in case of any reorganization or reclassification of the
outstanding shares thereof, the stock, securities or assets provided for in
subparagraph 6G.
6P. Mandatory Conversion on Public Offering. If at any time the
---------------------------------------
Corporation shall effect a firm commitment underwritten public offering (the
"Initial Public Offering") of shares of Common Stock in which (i) the aggregate
price paid for such shares by the public shall be at least $7,500,000 and (ii)
the price paid by the public for such shares shall be at least $.93 per share
(appropriately adjusted to reflect the occurrence of any event described in
subparagraph 6F), then effective upon the closing of the sale of such shares by
the Corporation pursuant to such public offering, all outstanding shares of
Series A Convertible Preferred Stock shall automatically convert to shares of
Common Stock on the basis set forth in this paragraph 6. Holders of shares of
Series A Convertible Preferred Stock so converted may deliver to the Corporation
at its principal office (or such other office or agency of the Corporation as
the Corporation may designate by notice in writing to such holders) during its
usual business hours, the certificate or certificates for the shares so
converted. As promptly as practicable thereafter, the Corporation shall issue
and deliver to such holder a certificate or certificates for the number of whole
shares of Common Stock to which such holder is entitled, together with any cash
dividends and payment in lieu of fractional shares to which such holder may be
entitled pursuant to subparagraph 6C. Until such time as a holder of shares of
Series A Convertible Preferred Stock shall surrender his or its certificates
therefor as provided above, such certificates shall be deemed to represent the
shares of Common Stock to which such holder shall be entitled upon the surrender
thereof.
6Q. Mandatory Conversion in Certain Circumstances. In the event that,
---------------------------------------------
at any time, 75% or more of the shares of the Series A Convertible Preferred
Stock issued pursuant to the Purchase Agreement shall have been converted into
fully paid and nonassessable shares of Common Stock, all of the remaining shares
of Series A Convertible Preferred Stock shall be deemed to be converted
automatically into fully paid and nonassessable shares of Common Stock, in the
manner and on the basis set forth in this paragraph 6.
7. Amendments. No provision of these terms of the Series A Convertible
----------
Preferred Stock may be amended, modified or waived without the written consent
or affirmative vote of the holders of greater than fifty percent (50%) of the
then outstanding shares of Series A Convertible Preferred Stock.
8. Special Mandatory Conversion. (a) If any holder of shares of Series A
----------------------------
Convertible Preferred Stock is entitled or otherwise afforded the right to
exercise the right of first refusal as set forth in paragraph 4 of the
Stockholders Agreement (the "Right of First Refusal") with respect to any equity
financing (the "Equity Financing") of the Corporation which would result in the
reduction of the Conversion Price, and (i) the Corporation has fully complied in
all respects with its obligations pursuant to paragraph 4 of the Stockholders
Agreement in respect
<PAGE>
-13-
thereof, (ii) the provisions of the Right of First Refusal set forth in
paragraph 4 of the Stockholders Agreement have not been waived at the written
request of the Corporation by such holder, and (iii) the holder is not
prohibited by law or government regulation from participating in the Equity
Financing, and if such holder (a "Non-Participating Holder") does not by
exercise of such holder's Right of First Refusal acquire such holder's Special
Proportionate Percentage (as hereinafter defined) of the Allocated Offered
Securities (as hereinafter defined) offered to the holders of the Series A
Convertible Preferred Stock in such Equity Financing (a "Mandatory Offering"),
all of such holder's shares of Series A Convertible Preferred Stock shall
automatically and without further action on the part of such holder be converted
effective subject to and concurrently with the consummation of the Mandatory
Offering (the "Mandatory Offering Date") as follows: all shares of Series A
Convertible Preferred Stock held by such Non-Participating Holder shall be
converted into a corresponding number of shares of a newly created series of
Preferred Stock (having only such number of shares as may be required in order
to effect such Special Mandatory Conversion under this paragraph 8) which such
series shall be identical in all respects to the Series A Convertible Preferred
Stock, except that the Conversion Price of such series shall be fixed
immediately prior to the Mandatory Offering Date at the Conversion Price then in
effect for the Series A Convertible Preferred Stock and shall be subject to no
further adjustments in a manner similar to that provided in paragraph 6D. The
Board of Directors shall take all necessary actions to designate such new
series. Upon such conversion, the shares of Series A Convertible Preferred Stock
so converted shall be canceled and not subject to reissuance. As used in this
paragraph 8, the following terms shall have the following respective meanings:
(1) "Allocated Offered Securities" shall mean the gross
amount of Offered New Securities (as defined on the Stockholders
Agreement) which has been offered for purchase by the holders of
the capital stock of the Corporation pursuant to paragraph 4 of
the Stockholders Agreement; and
(2) "Special Proportionate Percentage" shall mean as to a
holder of Series A Convertible Preferred Stock, that percentage figure
which expresses the ratio which (x) the number of shares of
outstanding Common Stock (including shares of Common Stock issuable
upon the exercise of outstanding convertible securities including
options and warrants) then owned by such holder bears to (y) the
Aggregate number of shares of outstanding Common Stock (including
shares of Common Stock issuable upon the exercise of outstanding
convertible securities including options and warrants) then owned by
all holders of shares of capital stock of the Corporation. For
purposes solely of the computation required for determination of the
Special Proportionate Percentage, the holders of outstanding Series A
Convertible Preferred Stock shall be treated as having converted all
such outstanding Series A Convertible Preferred Stock into shares of
Common Stock at the rate of which such securities are convertible into
Common Stock in effect at the time of such Equity Financing.
(b) The holder of any shares of Series A Convertible Preferred Stock
converted pursuant to paragraph 8(a) hereof, shall deliver to the Corporation
during regular business hours at the office of any transfer agent of the
Corporation for the Series A Convertible Preferred
<PAGE>
-14-
Stock, or at such other place as may be designated by the Corporation, the
certificate or certificates for the shares so converted, duly endorsed or
assigned in blank or to the Corporation. As promptly as practicable thereafter,
the Corporation shall issue and deliver to such holder, at the place designated
by such holder, a certificate or certificates for the number of full shares of
the new series of Preferred Stock to which such holder is entitled. The person
in whose name the certificate for such new series of Preferred Stock is to be
issued shall be deemed to have become a stockholder of record on the Mandatory
Offering Date unless the transfer books of the Corporation are closed on that
date, in which event he shall be deemed to have become a stockholder of record
on the next succeeding date on which the transfer books are open.
(c) In the event that at any time the Special Mandatory Conversion set
forth in this paragraph 8 shall not be effective as to all shares of the Series
A Convertible Preferred Stock then outstanding, the Board of Directors shall
take all necessary actions to designate new series of Preferred Stock (having
such distinctive designations and number of shares as the Board of Directors may
by resolution fix) on each such subsequent occasion that (i) any Equity
Financing occurs, and (ii) any holder of Series A Convertible Preferred Stock
does not by exercise of such holder's Right of First Refusal acquire his Special
Proportionate Percentage of the Allocated Offered Securities then so offered to
the holders of the Series A Convertible Preferred Stock shall be converted into
one share of such newly-created series of Preferred Stock concurrently with the
consummation of the subject Mandatory Offering. Such new series of Preferred
Stock shall be identical in all respects, except with respect to the respective
Conversion Price then in effect, to the new series of Preferred Stock created
pursuant to the provisions of paragraph 8(a).
B. COMMON STOCK
1. Relative Rights of Preferred Stock and Common Stock. All preferences,
---------------------------------------------------
voting powers, relative, participating, optional or other special rights and
privileges, and qualifications, limitations, or restrictions of the Common Stock
are expressly made subject and subordinate to those that may be fixed with
respect to any shares of the Preferred Stock.
2. Voting Rights. Except as otherwise required by law or this Certificate
-------------
of Incorporation, each holder of Common Stock shall have one vote in respect of
each share of stock held by him of record on the books of the Corporation for
the election of directors and on all matters submitted to a vote of stockholders
of the Corporation. Notwithstanding the provisions of Section 242(b)(2) of the
Delaware General Corporation Law, the number of authorized shares of Common
Stock may be increased or decreased (but not below the number of shares then
outstanding) by the affirmative vote of the holders of a majority of the
outstanding shares of capital stock of the Corporation, with each such share
being entitled to such number of votes per share as is provided in this Article
FOURTH.
3. Dividends. Subject to the preferential rights of the Preferred Stock, if
---------
any, the holders of shares of Common Stock shall be entitled to receive, when
and if declared by the Board of Directors, out of the assets of the Corporation
which are by law available therefor, dividends payable either in cash, in
property or in shares of capital stock; provided, however, that the Corporation
-------- -------
shall not declare a dividend with respect to the Preferred Stock unless the same
dividend (on an as-converted basis) is declared with respect to the Common
Stock; provided,
--------
<PAGE>
-15-
however, that the Corporation shall pay any such dividends in full first to the
holders of the Preferred Stock before any such dividends are paid to the holders
of Common Stock.
4. Dissolution, Liquidation or Winding Up. In the event of any dissolution,
--------------------------------------
liquidation or winding up of the affairs of the Corporation, after distribution
in full of the preferential amounts, if any, to be distributed to the holders of
shares of the Preferred Stock, holders of Common Stock shall be entitled, unless
otherwise provided by law or this Certificate of Incorporation, to receive all
of the remaining assets of the Corporation of whatever kind available for
distribution to stockholders ratably in proportion to the number of shares of
Common Stock held by them respectively.
FIFTH. The Corporation is to have perpetual existence.
SIXTH. In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware:
A. The Board of Directors of the Corporation is expressly authorized to
adopt, amend or repeal the By-Laws of the Corporation.
B. Elections of directors need not be by written ballot unless the By-
Laws of the Corporation shall so provide.
C. The books of the Corporation may be kept at such place within or
without the State of Delaware as the By-Laws of the Corporation may provide
or as may be designated from time to time by the Board of Directors of the
Corporation.
SEVENTH. The Corporation eliminates the personal liability of each member
of its Board of Directors to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided, however, that, to
the extent provided by applicable law, the foregoing shall not eliminate the
liability of a director (i) for any breach of such director's duty of loyalty to
the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of Title 8 of the Delaware Code or (iv) for any
transaction from which such director derived an improper personal benefit. No
amendment to or repeal of this provision 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 of such director occurring prior to such amendment or repeal.
EIGHTH. The Corporation reserves the right to amend or repeal any provision
contained in this Certificate of Incorporation, in the manner now or hereafter
prescribed by statute, and all rights conferred upon a stockholder herein are
granted subject to this reservation.
<PAGE>
-16-
NINTH. The name and mailing address of the sole incorporator is as
follows:
Name Mailing Address
----- ---------------
Jennifer C. Muto Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
TENTH. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
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 this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code, order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said 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 the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
I, THE UNDERSIGNED, being the sole incorporator hereinabove named, for
the purpose of forming a corporation pursuant to the General Corporation Law of
the State of Delaware, do make this certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this 9th day of June, 1998.
/s/ Jennifer C. Muto
______________________________
Jennifer C. Muto
Sole Incorporator
<PAGE>
-18-
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
MOTHER NATURE'S GENERAL STORE, INC.
Mother Nature's General Store, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: That pursuant to the authority conferred upon the Board of
Directors by the Certificate of Incorporation of the Corporation, the Board of
Directors, at a meeting of the Board of directors on June 15, 1998, duly adopted
a resolution setting forth an amendment to the Certificate of Incorporation of
the Corporation, declaring said amendment to be advisable and directed that the
matter be submitted to the stockholders of the Corporation for the approval of
said amendment.
SECOND: That the stockholders of the Corporation holding the
necessary number of shares of the outstanding capital stock of the Corporation
as required by statute and the Certificate of Incorporation of the Corporation
approved said amendment by written consent effective July 13, 1998, in
accordance with Section 228 of the General Corporation Law of the State of
Delaware.
THIRD: That said amendment would amend the Certificate of
Incorporation of the Corporation by amending and restating in its entirety
Article FIRST and substituting in lieu thereof the following new Article FIRST:
"FIRST. The name of the corporation is MotherNature.com, Inc.
(the "Corporation")."
FOURTH: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, Mother Nature's General Store, Inc. has caused
this certificate to be signed as of the 10th day of July, 1998.
MOTHER NATURE'S GENERAL STORE, INC.
By: /s/ Michael Barach
-------------------------------
Michael Barach
President and Chief Executive Officer
<PAGE>
-19-
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
MotherNature.com, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: That the Board of Directors of MotherNature.com, Inc. (the
"Corporation"), by unanimous written consent dated May 12, 1999, duly and
validly adopted the following resolutions:
RESOLVED: That, subject to stockholder approval, the Corporation amend its
Certificate of Incorporation as filed with the Secretary of State of
the State of Delaware (the "Certificate of Incorporation") so that,
as amended and restated Article FOURTH of the Certificate of
Incorporation shall be read in its entirety as set forth on Exhibit
-------
A attached hereto.
-
RESOLVED: That the foregoing amendment is hereby recommended to the
stockholders of the Corporation (the "Stockholders") as being
advisable and in the best interests of the Corporation and its
Stockholders.
RESOLVED: That the proposal to amend the Certificate of Incorporation, as set
forth in the preceding resolution, be submitted to the Stockholders
of the Corporation entitled to vote thereon for their approval in
compliance with Section 242 and 228 of the General Corporation Law
of the State of Delaware.
RESOLVED: That, subject to the approval by the Stockholders of the proposal to
amend the Certificate of Incorporation as described in the foregoing
resolutions, the President and Treasurer of the Corporation be, and
each individually hereby is, authorized and directed to amend the
Certificate of Incorporation as set forth above and to file such
amendment with the Secretary of State of the State of Delaware.
SECOND: That stockholders of the Corporation duly adopted such
resolutions by written consent on May 12, 1999, in accordance with the
provisions of Section 228 of the General Corporation Law of the State of
Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance
with the applicable provisions of Section 242 of the General Corporation Law of
the State of Delaware.
<PAGE>
-20-
IN WITNESS WHEREOF, said MotherNature.com, Inc. has caused this certificate
to be executed by Michael Barach, its President and Chief Executive Officer, and
attested to by Michael Bayer, its Treasurer and Secretary, on this 12th day of
May, 1999.
MOTHERNATURE.COM, INC.
By: /s/ Michael Barach
-------------------------------------
Michael Barach
President and Chief Executive Officer
ATTEST:
By: /s/ Michael Bayer
------------------------
Michael Bayer
Treasurer and Secretary
<PAGE>
-21-
Exhibit A
---------
"FOURTH. The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is 153,588,911, consisting
of 86,000,000 shares of Common Stock, par value $.01 per share (the "Common
Stock"), and 67,588,911 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"), of which 23,811,358 shares shall be designated Series A
Convertible Preferred Stock (the "Series A Convertible Preferred Stock"),
23,019,375 shares shall be designated Series B-1 Convertible Preferred Stock
(the "Series B-1 Convertible Preferred Stock"), 1,800,000 shares shall be
designated Series B-2 Convertible Preferred Stock (the "Series B-2 Convertible
Preferred Stock"),and 18,958,178 shares shall be designated Series C Convertible
Preferred Stock (the "Series C Convertible Preferred Stock").
Each series of Preferred Stock shall be so designated as to
distinguish the shares thereof from the shares of all other series and classes.
A. PREFERRED STOCK
1. Number of Shares. The series of Preferred Stock designated and
----------------
known as "Series A Convertible Preferred Stock" shall consist of 23,811,358
shares. The Series of Preferred Stock designated and known as "Series B-1
Convertible Preferred Stock" shall consist of 23,019,375 shares. The Series of
Preferred Stock designated and known as "Series B-2 Convertible Preferred Stock"
shall consist of 1,800,000 shares. The Series B-1 Convertible Preferred Stock
and the Series B-2 Convertible Preferred Stock are sometimes collectively
referred to herein as the "Series B Convertible Preferred Stock." The Series of
Preferred Stock designated and known as "Series C Convertible Preferred Stock"
shall consist of 18,958,178 shares. The Series A Convertible Preferred Stock
and the Series B Convertible Preferred Stock and the Series C Convertible
Preferred Stock are sometimes collectively referred to herein as the "Preferred
Stock."
2. Voting.
------
2A. General. Except as may be otherwise provided in this
-------
Certificate of Incorporation or by law, the Preferred Stock shall vote together
with all other classes and series of stock of the Corporation as a single class
on all actions to be taken by the stockholders of the Corporation, including,
but not limited to actions amending the Certificate of Incorporation of the
Corporation to increase the number of authorized shares of Common Stock. Each
share of Preferred Stock shall entitle the holder thereof to such number of
votes per share on each such action as shall equal the number of shares of
Common Stock (including fractions of a share) into which each share of Preferred
Stock is then convertible.
2B. Board Size. For so long as at least 50% of the maximum number
----------
of shares of Preferred Stock which were ever outstanding are, in fact,
outstanding (appropriately adjusted to reflect any stock split, stock dividend
or otherwise with respect to the Preferred Stock), the Corporation shall not,
without the written consent or affirmative vote of the holders of greater
<PAGE>
-22-
than fifty percent (50%) of the then outstanding shares of Preferred Stock,
given in writing or by vote at a meeting, consenting or voting (as the case may
be) separately as a class, increase the maximum number of directors constituting
the Board of Directors to a number in excess of seven (7).
2C. Board Seats.
-----------
(1) For only so long as at least 50% of the shares of Series A
Convertible Preferred Stock issued pursuant to that certain Series A Convertible
Preferred Stock Purchase Agreement dated as of June 10, 1998 by and between the
Corporation and the other parties named therein (the "Series A Purchase
Agreement") remain outstanding (appropriately adjusted to reflect any stock
split, stock dividend or otherwise with respect to the Series A Convertible
Preferred Stock), the holders of the Series A Convertible Preferred Stock,
voting as a separate series, shall be entitled to elect two (2) directors of the
Corporation. At any meeting (or in a written consent in lieu thereof) held for
the purpose of electing directors, the presence in person or by proxy (or the
written consent) of the holders of a majority of the shares of Series A
Convertible Preferred Stock then outstanding shall constitute a quorum of the
Series A Convertible Preferred Stock for the election of directors to be elected
solely by the holders of the Series A Convertible Preferred Stock. A vacancy in
any directorship elected by the holders of the Series A Convertible Preferred
Stock shall be filled only by vote or written consent of the holders of the
Series A Convertible Preferred Stock.
(2) For only so long as at least 50% of the shares of Series B-
1 Convertible Preferred Stock issued pursuant to that certain Series B-1
Convertible Preferred Stock Purchase Agreement dated as of December 21, 1998 by
and between the Corporation and the other parties named therein (the "Series B-1
Purchase Agreement") remain outstanding (appropriately adjusted to reflect any
stock split, stock dividend or otherwise with respect to the Series B-1
Convertible Preferred Stock), the holders of the Series B Convertible Preferred
Stock, voting as a separate series, shall be entitled to elect two (2) directors
of the Corporation. At any meeting (or in a written consent in lieu thereof)
held for the purpose of electing directors, the presence in person or by proxy
(or the written consent) of the holders of a majority of the shares of Series B
Convertible Preferred Stock then outstanding shall constitute a quorum of the
Series B Convertible Preferred Stock for the election of directors to be elected
solely by the holders of the Series B Convertible Preferred Stock. A vacancy in
any directorship elected by the holders of the Series B Convertible Preferred
Stock shall be filled only by vote or written consent of the holders of the
Series B Convertible Preferred Stock.
(3) For only so long as at least 50% of the shares of Series C
Convertible Preferred Stock issued pursuant to that certain Series C Convertible
Preferred Stock Purchase Agreement dated as of May 12, 1999 by and between the
Corporation and the other parties named therein (the "Series C Purchase
Agreement") remain outstanding (appropriately adjusted to reflect any stock
split, stock dividend or otherwise with respect to the Series C Convertible
Preferred Stock), the holders of the Series C Convertible Preferred Stock,
voting as a separate series, shall be entitled to elect two (2) directors of the
Corporation. At any meeting (or in a written consent in lieu thereof) held for
the purpose of electing directors, the presence in person or by proxy (or the
written consent) of the holders of a majority of the shares of Series C
<PAGE>
-23-
Convertible Preferred Stock then outstanding shall constitute a quorum of the
Series C Convertible Preferred Stock for the election of directors to be elected
solely by the holders of the Series C Convertible Preferred Stock. A vacancy in
any directorship elected by the holders of the Series C Convertible Preferred
Stock shall be filled only by vote or written consent of the holders of the
Series C Convertible Preferred Stock.
(4) The holders of the Common Stock, voting as a separate class, shall
be entitled to elect all of the remaining directors of the Corporation. At any
meeting (or in a written consent in lieu thereof) held for the purpose of
electing directors, the presence in person or by proxy (or the written consent)
of the holders of a majority of the shares of Common Stock then outstanding
shall constitute a quorum of the Common Stock for the election of directors to
be elected solely by the holders of the Common Stock. A vacancy in any
directorship elected by the holders of the Common Stock shall be filled only by
vote or written consent of the holders of the Common Stock.
3. Dividends. The holders of the Preferred Stock shall be entitled
---------
to receive, out of funds legally available therefor, when and if declared by the
Board of Directors, quarterly dividends at the rate per annum of (i) $.0186 per
share with respect to the Series A Convertible Preferred Stock (the "Series A
Dividends"), (ii) $.0313 per share with respect to the Series B-1 Convertible
Preferred Stock (the "Series B-1 Dividends"), (iii) $.0300 per share with
respect to the Series B-2 Convertible Preferred Stock (the "Series B-2
Dividends"), and (iv) $0.1367 per share with respect to the Series C Convertible
Preferred Stock (the "Series C Dividends") (the Series A Dividends, the Series
B-1 Dividends, the Series B-2 Dividends and the Series C Dividends are
collectively referred to herein as the "Preferred Dividends"). The Preferred
Dividends shall not be cumulative. No dividends shall be declared with respect
to the Preferred Stock unless and solely to the extent that a dividend in the
amount of $.0186 per share (on an as-converted basis) is declared with respect
to the Common Stock; provided, however, that the Corporation shall pay any such
-------- -------
dividends in full first to the holders of the Preferred Stock before any such
dividends are paid to the holders of Common Stock.
4. Liquidation. Upon any liquidation, dissolution or winding up of
-----------
the Corporation, whether voluntary or involuntary, distributions to the
stockholders of the Corporation shall be made in the following manner:
4A. The holders of the shares of Series A Convertible Preferred Stock
shall be entitled to be paid an amount equal to $0.31 per share plus, in the
case of each share, an amount equal to all Series A Dividends declared but
unpaid thereon and any other dividends declared but unpaid thereon, computed to
the date payment thereof is made available, together (at the same time) with
payment to any class of stock ranking on liquidation equally with the Series A
Convertible Preferred Stock, and before any payment shall be made to the holders
of any stock ranking on liquidation junior to the Series A Convertible Preferred
Stock, such amount payable with respect to one share of Series A Convertible
Preferred Stock being sometimes referred to as the "Series A Liquidation
Preference Payment" and with respect to all shares of Series A Convertible
Preferred Stock being sometimes referred to as the "Series A Liquidation
Preference Payments." The holders of the shares of Series B-1 Convertible
Preferred Stock shall be entitled to be paid an amount equal to $0.5213 per
share plus, in the case of each share, an amount equal
<PAGE>
-24-
to all Series B-1 Dividends declared but unpaid thereon and any other dividends
declared but unpaid thereon, computed to the date payment thereof is made
available, together (at the same time) with payment to any class of stock
ranking on liquidation equally with the Series B-1 Convertible Preferred Stock,
and before any payment shall be made to the holders of any stock ranking on
liquidation junior to the Series B-1 Convertible Preferred Stock, such amount
payable with respect to one share of Series B-1 Convertible Preferred Stock
being sometimes referred to as the "Series B-1 Liquidation Preference Payment"
and with respect to all shares of Series B-1 Convertible Preferred Stock being
sometimes referred to as the "Series B-1 Liquidation Preference Payments." The
holders of the shares of Series B-2 Convertible Preferred Stock shall be
entitled to be paid an amount equal to $0.50 per share plus, in the case of each
share, an amount equal to all Series B-2 Dividends declared but unpaid thereon
and any other dividends declared but unpaid thereon, computed to the date
payment thereof is made available, together (at the same time) with payment to
any class of stock ranking on liquidation equally with the Series B-2
Convertible Preferred Stock, and before any payment shall be made to the holders
of any stock ranking on liquidation junior to the Series B-2 Convertible
Preferred Stock, such amount payable with respect to one share of Series B-2
Convertible Preferred Stock being sometimes referred to as the "Series B-2
Liquidation Preference Payment" and with respect to all shares of Series B-2
Convertible Preferred Stock being sometimes referred to as the "Series B-2
Liquidation Preference Payments." The holders of the shares of Series C
Convertible Preferred Stock shall be entitled to be paid an amount equal to
$2.2787 per share plus, in the case of each share, an amount equal to all Series
C Dividends declared but unpaid thereon and any other dividends declared but
unpaid thereon, computed to the date payment thereof is made available, together
(at the same time) with payment to any class of stock ranking on liquidation
equally with the Series C Convertible Preferred Stock, and before any payment
shall be made to the holders of any stock ranking on liquidation junior to the
Series C Convertible Preferred Stock, such amount payable with respect to one
share of Series C Convertible Preferred Stock being sometimes referred to as the
"Series C Liquidation Preference Payment" and with respect to all shares of
Series C Convertible Preferred Stock being sometimes referred to as the "Series
C Liquidation Preference Payments." The Series A Liquidation Preference Payment,
the Series B-1 Liquidation Preference Payment, the Series B-2 Liquidation
Preference Payment and the Series C Liquidation Preference Payment are sometimes
referred to collectively as the "Preferred Stock Liquidation Preference
Payments." For purposes hereof, the Series A Convertible Preferred Stock, Series
B-1 Convertible Preferred Stock, Series B-2 Convertible Preferred Stock and
Series C Convertible Preferred Stock shall all rank equally on liquidation. If
upon such liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed among the holders of
Preferred Stock shall be insufficient to permit payment in full to such
stockholders of the Preferred Stock Liquidation Preference Payments, then all of
the assets of the Corporation available for distribution to holders of the
Preferred Stock shall be distributed to such holders of the Preferred Stock pro
rata, so that each holder receives that portion of the assets available for
distribution as the amount of the full liquidation preference to which such
holder would otherwise be entitled bears to the amount of the full liquidation
preference to which all holders of the Preferred Stock would otherwise be
entitled pursuant to this paragraph 4A.
4B. Upon any such liquidation, dissolution or winding up of the
Corporation, immediately after the holders of Preferred Stock shall have been
paid in full the Preferred Stock
<PAGE>
-25-
Liquidation Preference Payments set forth in subparagraph 4A above, the
remaining net assets of the Corporation available for distribution shall be
distributed ratably among the holders of Common Stock and there shall be no
further distributions to such holders of the Preferred Stock. Nothing contained
herein, however, shall limit the right of the holders of the Preferred Stock to
elect to convert their shares of Preferred Stock into shares of Common Stock
pursuant to subparagraph 6A hereof.
4C. Written notice of any such liquidation, dissolution or winding
up, stating a payment date, the amount of the payments payable to the holders of
Preferred Stock pursuant to subparagraph 4A and the place where said payments
shall be payable, shall be delivered in person, mailed by certified or
registered mail, return receipt requested, or sent by telecopier or telex, not
less than 20 days prior to the payment date stated therein, to the holders of
record of Preferred Stock, such notice to be addressed to each such holder at
its address as shown by the records of the Corporation. The consolidation or
merger of the Corporation into or with any other entity or entities which
results in the exchange of outstanding shares of the Corporation for securities
or other consideration issued or paid or caused to be issued or paid by any such
entity or affiliate thereof (other than a merger to re-incorporate the
Corporation in a different jurisdiction, a consolidation or merger into a
subsidiary, or a merger in which the Corporation is the surviving Corporation
and the holders of the Corporation's voting stock outstanding immediately prior
to the transaction constitute a majority of the holders of voting stock
outstanding immediately following the transaction), and the sale, lease,
abandonment, transfer or other disposition by the Corporation of all or
substantially all its assets, shall be deemed to be a liquidation, dissolution
or winding up of the Corporation within the meaning of the provisions of this
paragraph 4. For purposes hereof, the Common Stock shall rank on liquidation
junior to the Preferred Stock. Whenever the distribution provided for in this
paragraph 4 shall be payable in property other than cash, the value of such
distribution shall be the fair market value of such property as determined in
good faith by the Board of Directors of the Corporation.
5. Restrictions.
------------
5A. For so long as at least 50% of the maximum number of shares of
Preferred Stock which were ever outstanding are, in fact, outstanding
(appropriately adjusted to reflect any stock split, stock dividend or otherwise
with respect to the Preferred Stock), except where the vote or written consent
of the holders of a greater number of shares of the Corporation is required by
law or by the Certificate of Incorporation, and in addition to any other vote
required by law or this Certificate of Incorporation, without the approval of
the holders of greater than fifty percent (50%) of the then outstanding shares
of Preferred Stock, given in writing or by vote at a meeting, consenting or
voting (as the case may be) as a single class, the Corporation will not:
(1) Create or authorize the creation of any additional class or
series of shares of stock unless the same ranks junior to the Series A
Convertible Preferred Stock, the Series B-1 Convertible Preferred Stock, the
Series B-2 Convertible Preferred Stock and Series C Convertible Preferred Stock
as to the distribution of assets on the liquidation, dissolution or winding up
of the Corporation, or increase the authorized amount of any series of Preferred
Stock or increase the authorized amount of any additional class or series of
shares of stock unless the same ranks junior to the Series A Convertible
Preferred Stock, the Series B-1 Convertible
<PAGE>
-26-
Preferred Stock, the Series B-2 Convertible Preferred Stock and Series C
Convertible Preferred Stock as to the distribution of assets on the liquidation,
dissolution or winding up of the Corporation, or create or authorize any
obligation or security convertible into shares of any series of Preferred Stock
or into shares of any other class or series of stock unless the same ranks
junior to the Series A Convertible Preferred Stock, the Series B-1 Convertible
Preferred Stock, the Series B-2 Convertible Preferred Stock and Series C
Convertible Preferred Stock as to the distribution of assets on the liquidation,
dissolution or winding up of the Corporation, whether any such creation,
authorization or increase shall be by means of amendment to the Certificate of
Incorporation or by merger, consolidation or otherwise;
(2) Consent to any liquidation, dissolution or winding up of the
Corporation or consolidate or merge into or with any other entity or entities
(other than a merger to re-incorporate the Corporation in a different
jurisdiction, a consolidation or merger into a Subsidiary, or a merger in which
the Corporation is the surviving Corporation and the holders of the
Corporation's voting stock outstanding immediately prior to the transaction
constitute a majority of the holders of voting stock outstanding immediately
following the transaction) or sell, lease, abandon, transfer or otherwise
dispose of all or substantially all its assets;
(3) Purchase or set aside any sums for the purchase of, or pay
any dividend or make any distribution on, any shares of stock other than the
Preferred Stock, except for dividends or other distributions payable on the
Common Stock solely in the form of additional shares of Common Stock and except
for the purchase of shares of Common Stock (i) pursuant to the terms of that
certain Second Amended and Restated Stockholders Agreement dated as of May 12,
1999 (the "Second Amended and Restated Stockholders Agreement") by and between
the Corporation and the other parties named therein, or (ii) from former
employees of the Corporation, if each such purchase is made pursuant to
contractual rights held by the Corporation relating to the termination of
employment of such former employee and the purchase price does not exceed the
original issue price paid by such former employee to the Corporation for such
shares;
(4) Redeem or otherwise acquire any shares of Preferred Stock
except pursuant to the Second Amended and Restated Stockholders Agreement or
pursuant to a purchase offer made pro rata to all holders of the shares of
Preferred Stock on the basis of the aggregate number of outstanding shares of
Preferred Stock then held by each such holder; or
(5) In any manner alter or change the designations, powers,
preferences, rights, qualifications, limitations or restrictions of the
Preferred Stock.
5B. For so long as at least 50% of the maximum number of shares of
any series of Preferred Stock which were ever outstanding are, in fact,
outstanding (appropriately adjusted to reflect any stock split, stock dividend
or otherwise with respect to such series of Preferred Stock), except where the
vote or written consent of the holders of a greater number of shares of the
Corporation is required by law or by the Certificate of Incorporation, and in
addition to any other vote required by law or this Certificate of Incorporation,
without the approval of the holders of greater than fifty percent (50%) of the
then outstanding shares of such series of Preferred Stock, given in writing or
by vote at a meeting, consenting or voting (as the
<PAGE>
-27-
case may be) separately as a series, the Corporation will not amend, alter or
repeal its Certificate of Incorporation if the effect would be materially
adverse in any manner with respect to the rights of the holders of such series
of Preferred Stock hereunder.
5C. For so long as at least 50% of the maximum number of shares of
Series C Preferred Stock which were ever outstanding are, in fact, outstanding
(appropriately adjusted to reflect any stock split, stock dividend or otherwise
with respect to such series of Preferred Stock), except where the vote or
written consent of the holders of a greater number of shares of the Corporation
is required by law or by the Certificate of Incorporation, and in addition to
any other vote required by law or the provisions of paragraph 5A above, the
Corporation will not enter into any of the transactions set forth in subsection
(2) of such paragraph 5A if (and only if) the consideration per share receivable
by any holder of Series C Preferred Stock in such a transaction is less than
$3.4180 without the approval of the holders of greater than fifty percent (50%)
of the then outstanding shares of Series C Preferred Stock, given in writing or
by vote at a meeting, consenting or voting (as the case may be) separately as a
single series.
6. Conversions. The holders of shares of Preferred Stock shall have the
following conversion rights:
6A. Right to Convert. Subject to the terms and conditions of this
----------------
paragraph 6, the holder of any share or shares of Preferred Stock shall have the
right, at its option at any time, to convert any of such shares of Preferred
Stock (except that upon any liquidation of the Corporation the right of
conversion shall terminate at the close of business on the business day fixed
for payment of the amount distributable on the Preferred Stock) into such number
of fully paid and nonassessable shares of Common Stock as is obtained (a) in the
case of the Series A Convertible Preferred Stock, by (i) multiplying the number
of shares of Series A Convertible Preferred Stock so to be converted by $0.31
and (ii) dividing the result by the conversion price of $0.31 per share or, in
case an adjustment of such price has taken place pursuant to the further
provisions of this paragraph 6, then by the conversion price as last adjusted
and in effect at the date any share or shares of Series A Convertible Preferred
Stock are surrendered for conversion (such price, or such price as last
adjusted, being referred to as the "Series A Conversion Price"), (b) in the case
of the Series B-1 Convertible Preferred Stock, by (i) multiplying the number of
shares of Series B-1 Convertible Preferred Stock so to be converted by $0.5213
and (ii) dividing the result by the conversion price of $0.5213 per share or, in
case an adjustment of such price has taken place pursuant to the further
provisions of this paragraph 6, then by the conversion price as last adjusted
and in effect at the date any share or shares of Series B-1 Convertible
Preferred Stock are surrendered for conversion (such price, or such price as
last adjusted, being referred to as the "Series B-1 Conversion Price"), (c) in
the case of the Series B-2 Convertible Preferred Stock, by (i) multiplying the
number of shares of Series B-2 Convertible Preferred Stock so to be converted by
$0.50 and (ii) dividing the result by the conversion price of $0.50 per share
or, in case an adjustment of such price has taken place pursuant to the further
provisions of this paragraph 6, then by the conversion price as last adjusted
and in effect at the date any share or shares of Series B-2 Convertible
Preferred Stock are surrendered for conversion (such price, or such price as
last adjusted, being referred to as the "Series B-2 Conversion Price"), and (d)
in the case of the Series C Convertible Preferred Stock, by (i) multiplying the
number of shares of Series C Convertible Preferred Stock so to be converted by
$2.2787 and (ii) dividing the result
<PAGE>
-28-
by the conversion price of $2.2787 per share or, in case an adjustment of such
price has taken place pursuant to the further provisions of this paragraph 6,
then by the conversion price as last adjusted and in effect at the date any
share or shares of Series C Convertible Preferred Stock are surrendered for
conversion (such price, or such price as last adjusted, being referred to as the
"Series C Conversion Price") (the Series A Conversion Price, the Series B-1
Conversion Price, the Series B-2 Conversion Price and the Series C Conversion
Price are each sometimes referred to herein as "Conversion Price"). Such rights
of conversion shall be exercised by the holder thereof by giving written notice
that the holder elects to convert all of the shares of Preferred Stock held by
such holder into Common Stock and by surrender of a certificate or certificates
for the shares so to be converted to the Corporation at its principal office (or
such other office or agency of the Corporation as the Corporation may designate
by notice in writing to the holders of the Preferred Stock) at any time during
its usual business hours on the date set forth in such notice, together with a
statement of the name or names (with address) in which the certificate or
certificates for shares of Common Stock shall be issued.
6B. Issuance of Certificates; Time Conversion Effected. Promptly
--------------------------------------------------
after the receipt of the written notice referred to in subparagraph 6A and
surrender of the certificate or certificates for the share or shares of
Preferred Stock to be converted, the Corporation shall issue and deliver, or
cause to be issued and delivered, to the holder, registered in such name or
names as such holder may direct, a certificate or certificates for the number of
whole shares of Common Stock issuable upon the conversion of such share or
shares of Preferred Stock. To the extent permitted by law, such conversion
shall be deemed to have been effected and the Series A Conversion Price, Series
B-1 Conversion Price, Series B-2 Conversion Price and/or Series C Conversion
Price shall be determined as of the close of business on the date on which such
written notice shall have been received by the Corporation and the certificate
or certificates for such share or shares shall have been surrendered as
aforesaid, and at such time the rights of the holder of such share or shares of
Preferred Stock shall cease, and the person or persons in whose name or names
any certificate or certificates for shares of Common Stock shall be issuable
upon such conversion shall be deemed to have become the holder or holders of
record of the shares represented thereby.
6C. Fractional Shares; Dividends; Partial Conversion. No fractional
------------------------------------------------
shares shall be issued upon conversion of Preferred Stock into Common Stock and
no payment or adjustment shall be made upon any conversion on account of any
cash dividends on the Common Stock issued upon such conversion. At the time of
each conversion, the Corporation shall pay in cash an amount equal to all
dividends accrued and unpaid on the shares of Preferred Stock surrendered for
conversion to the date upon which such conversion is deemed to take place as
provided in subparagraph 6B. In case the number of shares of Preferred Stock
represented by the certificate or certificates surrendered pursuant to
subparagraph 6A exceeds the number of shares converted, the Corporation shall,
upon such conversion, execute and deliver to the holder, at the expense of the
Corporation, a new certificate or certificates for the number of shares of
Preferred Stock represented by the certificate or certificates surrendered which
are not to be converted. If any fractional share of Common Stock would, except
for the provisions of the first sentence of this subparagraph 6C, be delivered
upon such conversion, the Corporation, in lieu of delivering such fractional
share, shall pay to the holder surrendering the Preferred Stock for conversion
an
<PAGE>
-29-
amount in cash equal to the current market price of such fractional share as
determined in good faith by the Board of Directors of the Corporation.
6D. Adjustment of Price Upon Issuance of Common Stock. Except as
-------------------------------------------------
provided in subparagraph 6E, if and whenever the Corporation shall issue or
sell, or is, in accordance with subparagraphs 6D(1) through 6D(7), deemed to
have issued or sold, any shares of Common Stock for a consideration per share
less than the Series A Conversion Price, Series B-1 Conversion Price, Series B-2
Conversion Price, and/or Series C Conversion Price, as applicable (the
"Applicable Conversion Price"), in effect immediately prior to the time of such
issue or sale, then, forthwith upon such issue or sale, such Applicable
Conversion Price for any outstanding shares of such series of Preferred Stock
shall be reduced to the price determined by dividing (i) an amount equal to the
sum of (a) the number of shares of Common Stock outstanding immediately prior to
such issue or sale multiplied by the then existing Applicable Conversion Price
and (b) the consideration, if any, received by the Corporation upon such issue
or sale, by (ii) the total number of shares of Common Stock outstanding
immediately after such issue or sale; provided, however, that, for the purpose
-------- -------
of this subparagraph 6D, all shares of Common Stock issuable upon conversion of
shares of Preferred Stock outstanding immediately prior to such issue shall be
deemed to be outstanding, and immediately after any additional shares of Common
Stock are deemed issued pursuant to subparagraph 6D(1) or 6D(2) (and
notwithstanding the provisions of subparagraph 6E), such additional shares of
Common Stock shall be deemed to be outstanding.
For purposes of this subparagraph 6D, the following subparagraphs 6D(1) to
6D(7) shall also be applicable:
6D(1) Issuance of Rights or Options. In case at any time the
-----------------------------
Corporation shall in any manner grant (whether directly or by assumption in a
merger or otherwise) any warrants or other rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such warrants,
rights or options being called "Options" and such convertible or exchangeable
stock or securities being called "Convertible Securities") whether or not
such Options or the right to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for which
Common Stock is issuable upon the exercise of such Options or upon the
conversion or exchange of such Convertible Securities (determined by dividing
(i) the total amount, if any, received or receivable by the Corporation as
consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Corporation upon the
exercise of all such Options, plus, in the case of such Options which relate
to Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options) shall be less than an Applicable
Conversion Price in effect immediately prior to the time of the granting of
such Options, then the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon conversion or exchange of
the total maximum amount of such Convertible Securities
<PAGE>
-30-
issuable upon the exercise of such Options shall be deemed to have been
issued for such price per share as of the date of granting of such Options or
the issuance of such Convertible Securities and thereafter shall be deemed to
be outstanding. Except as otherwise provided in subparagraph 6D(3), no
adjustment of such Applicable Conversion Price shall be made upon the actual
issue of such Common Stock or of such Convertible Securities upon exercise of
such Options or upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities.
6D(2) Issuance of Convertible Securities. In case the Corporation
----------------------------------
shall in any manner issue (whether directly or by assumption in a merger or
otherwise) or sell any Convertible Securities, whether or not the rights to
exchange or convert any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon
such conversion or exchange (determined by dividing (i) the total amount
received or receivable by the Corporation as consideration for the issue or
sale of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof, by (ii) the total maximum number of shares of
Common Stock issuable upon the conversion or exchange of all such Convertible
Securities) shall be less than an Applicable Conversion Price in effect
immediately prior to the time of such issue or sale, then the total maximum
number of shares of Common Stock issuable upon conversion or exchange of all
such Convertible Securities shall be deemed to have been issued for such
price per share as of the date of the issue or sale of such Convertible
Securities and thereafter shall be deemed to be outstanding, provided that
(a) except as otherwise provided in subparagraph 6D(3), no adjustment of such
Applicable Conversion Price shall be made upon the actual issue of such
Common Stock upon conversion or exchange of such Convertible Securities and
(b) if any such issue or sale of such Convertible Securities is made upon
exercise of any Options to purchase any such Convertible Securities for which
adjustments of such Applicable Conversion Price have been or are to be made
pursuant to other provisions of this subparagraph 6D, no further adjustment
of such Applicable Conversion Price shall be made by reason of such issue or
sale.
6D(3) Change in Option Price or Conversion Rate. Upon the
-----------------------------------------
happening of any of the following events, namely, if the purchase price
provided for in any Option referred to in subparagraph 6D(1), the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraph 6D(1) or 6D(2), or the
rate at which Convertible Securities referred to in subparagraph 6D(1) or
6D(2) are convertible into or exchangeable for Common Stock shall change at
any time (including, but not limited to, changes under or by reason of
provisions designed to protect against dilution), the Applicable Conversion
Price in effect at the time of such event shall forthwith be readjusted to
the Applicable Conversion Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for
such changed purchase price, additional consideration or conversion rate, as
the case may be, at the time initially granted, issued or sold; and on the
termination of any such Option or any such right to convert or exchange such
Convertible Securities, the Applicable Conversion Price then in effect
hereunder shall forthwith be increased to the Applicable Conversion Price
which would have been in effect at the time of such termination had such
Option or Convertible
<PAGE>
-31-
Securities, to the extent outstanding immediately prior to such termination,
never been issued.
6D(4) Stock Dividends. In case the Corporation shall declare a
---------------
dividend or make any other distribution upon any stock of the Corporation
(other than the Common Stock) payable in Common Stock, Options or Convertible
Securities, then any Common Stock, Options or Convertible Securities, as the
case may be, issuable in payment of such dividend or distribution shall be
deemed to have been issued or sold without consideration.
6D(5) Consideration for Stock. In case any shares of Common
-----------------------
Stock, Options or Convertible Securities 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 allowed by
the Corporation in connection therewith. In case any shares of Common Stock,
Options or Convertible Securities 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 of the Corporation,
without deduction of any expenses 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 of
the Corporation.
6D(6) Record Date. In case the Corporation shall take a record of
-----------
the holders of its Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock, Options or
Convertible Securities or (ii) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such record date shall be deemed to
be the date of the issue or sale of the shares of Common Stock deemed to have
been issued or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
6D(7) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or
for the account of the Corporation, and the disposition of any such shares
shall be considered an issue or sale of Common Stock for the purpose of this
subparagraph 6D.
6E. Certain Issues of Common Stock Excepted. Anything herein to the
---------------------------------------
contrary notwithstanding, the Corporation shall not be required to make any
adjustment of any Conversion Price in the case of the issuance from and after
the date of filing of these terms of the Preferred Stock of (i) shares of Common
Stock (or options to purchase such shares) pursuant to agreements or plans
adopted by the Board of Directors of the Corporation to directors, officers,
employees, consultants or referring physicians of the Corporation in connection
with their service as directors of the Corporation, their employment by the
Corporation, their retention as
<PAGE>
-32-
consultants by or the maintenance of a business relationship with the
Corporation, (ii) shares of Common Stock issued upon the exercise of Common
Stock Purchase Warrants outstanding as of the date of the initial issuance of
the Series C Convertible Preferred Stock, (iii) solely in consideration for the
acquisition (whether by merger or otherwise) by the Corporation or any of its
subsidiaries of all or substantially all of the stock or assets of any other
entity, (iv) shares of Series B-2 Convertible Preferred Stock issued pursuant to
Section 2.4 of the Subordinated Loan and Security Agreement dated December 4,
1998 by and between the Corporation and Comdisco, Inc., (v) shares of capital
stock, or options or warrants therefor, to be issued subject to the approval of
the Corporation's Board of Directors to equipment leasing organizations in
connection with equipment leasing arrangements to which the Corporation is or
shall become a party, and (vi) shares of Common Stock issued upon conversion of
the Preferred Stock.
6F. Subdivision or Combination of Common Stock. In case the
------------------------------------------
Corporation shall at any time subdivide (by any stock split, stock dividend or
otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Series A Conversion Price, the Series B-1 Conversion Price, the
Series B-2 Conversion Price, and the Series C Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and,
conversely, in case the outstanding shares of Common Stock shall be combined
into a smaller number of shares, the Series A Conversion Price, the Series B-1
Conversion Price, the Series B-2 Conversion Price, and the Series C Conversion
Price in effect immediately prior to such combination shall be proportionately
increased. In the case of any such subdivision, no further adjustment shall be
made pursuant to subparagraph 6D(4) by reason thereof.
6G. Reorganization or Reclassification. If any capital
----------------------------------
reorganization, reclassification, recapitalization, consolidation, merger, sale
of all or substantially all of the Corporation's assets or other similar
transaction (any such transaction being referred to herein as an "Organic
Change") shall be effected in such a way that holders of Common Stock shall be
entitled to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock, then, as a
condition of such Organic Change, lawful and adequate provisions shall be made
whereby each holder of a share or shares of Preferred Stock shall thereupon have
the right to receive, upon the basis and upon the terms and conditions specified
herein and in lieu of or in addition to, as the case may be, the shares of
Common Stock immediately theretofore receivable upon the conversion of such
share or shares of Preferred Stock, such shares of stock, securities or assets
as may be issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares of such
Common Stock immediately theretofore receivable upon such conversion had such
Organic Change not taken place, and in any case of a reorganization or
reclassification only appropriate provisions shall be made with respect to the
rights and interests of such holder to the end that the provisions hereof
(including without limitation provisions for adjustments of the any Applicable
Conversion Price) shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise of such conversion rights.
6H. Notice of Adjustment. Upon any adjustment of an Applicable
--------------------
Conversion Price, then and in each such case the Corporation shall give written
notice thereof, by delivery in person, certified or registered mail, return
receipt requested, telecopier or telex, addressed to each
<PAGE>
-33-
holder of shares of Preferred Stock at the address of such holder as shown on
the books of the Corporation, which notice shall state the Series A Conversion
Price, the Series B-1 Conversion Price, Series B-2 Conversion Price and/or
Series C Conversion Price resulting from such adjustment, setting forth in
reasonable detail the method upon which such calculation is based.
6I. Other Notices. In case at any time:
-------------
(1) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the holders
of its Common Stock;
(2) the Corporation shall offer for subscription pro rata to the
--- ----
holders of its Common Stock any additional shares of stock of any class or
other rights;
(3) there shall be any capital reorganization or reclassification
of the capital stock of the Corporation, or a consolidation or merger of the
Corporation with or into another entity or entities, or a sale, lease,
abandonment, transfer or other disposition of all or substantially all its
assets; or
(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier or
telex, addressed to each holder of any shares of Preferred Stock at the address
of such holder as shown on the books of the Corporation, (a) at least 20 days'
prior written notice of the date on which the books of the Corporation shall
close or a record shall be taken for such dividend, distribution or subscription
rights or for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, disposition, dissolution, liquidation or winding up, at
least 20 days prior written notice of the date when the same shall take place.
Such notice in accordance with the foregoing clause (a) shall also specify, in
the case of any such dividend, distribution or subscription rights, the date on
which the holders of Common Stock shall be entitled thereto and such notice in
accordance with the foregoing clause (b) shall also specify the date on which
the holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding up, as the case may be.
6J. Stock to be Reserved. The Corporation will at all times reserve
--------------------
and keep available out of its authorized Common Stock, solely for the purpose of
issuance upon the conversion of Preferred Stock as herein provided, such number
of shares of Common Stock as shall then be issuable upon the conversion of all
outstanding shares of Preferred Stock. The Corporation covenants that all
shares of Common Stock which shall be so issued shall be duly and validly issued
and fully paid and nonassessable and free from all taxes, liens and charges with
respect to the issue thereof, and, without limiting the generality of the
foregoing, the Corporation covenants that it will from time to time take all
such action as may be requisite to
<PAGE>
-34-
assure that the par value per share of the Common Stock is at all times equal to
or less than the Series A Conversion Price, Series B-1 Conversion Price, Series
B-2 Conversion Price and Series C Conversion Price in effect at the time. The
Corporation will take all such action as may be necessary to assure that all
such shares of Common Stock may be so issued without violation of any applicable
law or regulation, or of any requirement of any national securities exchange
upon which the Common Stock may be listed.
6K. No Reissuance of Preferred Stock. Shares of Preferred Stock
--------------------------------
which are converted into shares of Common Stock as provided herein shall not be
reissued.
6L. Issue Tax. The issuance of certificates for shares of Common
---------
Stock upon conversion of Preferred Stock 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 the Preferred Stock which is being
converted.
6M. Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any Preferred Stock or of any shares of
Common Stock issued or issuable upon the conversion of any shares of Preferred
Stock in any manner which interferes with the timely conversion of such
Preferred Stock, except as may otherwise be required to comply with applicable
securities laws.
6N. Definition of Common Stock. As used in this paragraph 6, the
--------------------------
term "Common Stock" shall mean and include the Corporation's authorized Common
Stock, par value $0.01 per share, as constituted on the date of filing of these
terms of the Preferred Stock, and shall also include any capital stock of any
class of the Corporation thereafter authorized which shall not be limited to a
fixed sum or percentage in respect of the rights of the holders thereof to
participate in dividends or in the distribution of assets upon the voluntary or
involuntary liquidation, dissolution or winding up of the Corporation; provided
that the shares of Common Stock receivable upon conversion of shares of
Preferred Stock shall include only shares designated as Common Stock of the
Corporation on the date of filing of this instrument, or in case of any
reorganization or reclassification of the outstanding shares thereof, the stock,
securities or assets provided for in subparagraph 6G.
6O. Mandatory Conversion on Public Offering. If at any time the
---------------------------------------
Corporation shall effect a public offering of shares of Common Stock in which
(i) the aggregate price paid for such shares by the public shall be at least
$20,000,000 and (ii) the price paid by the public for such shares shall be at
least $3.4180 per share (appropriately adjusted to reflect the occurrence of any
event described in subparagraph 6F) (herein, an "Initial Public Offering"), then
effective upon the closing of the sale of such shares by the Corporation
pursuant to such public offering, all outstanding shares of Preferred Stock
shall automatically convert to shares of Common Stock on the basis set forth in
this paragraph 6. Holders of shares of Preferred Stock so converted may deliver
to the Corporation at its principal office (or such other office or agency of
the Corporation as the Corporation may designate by notice in writing to such
holders) during its usual business hours, the certificate or certificates for
the shares so converted. As promptly as
<PAGE>
-35-
practicable thereafter, the Corporation shall issue and deliver to such holder a
certificate or certificates for the number of whole shares of Common Stock to
which such holder is entitled, together with any cash dividends and payment in
lieu of fractional shares to which such holder may be entitled pursuant to
subparagraph 6C. Until such time as a holder of shares of Preferred Stock shall
surrender his or its certificates therefor as provided above, such certificates
shall be deemed to represent the shares of Common Stock to which such holder
shall be entitled upon the surrender thereof.
6P. Mandatory Conversion in Certain Circumstances. In the event
---------------------------------------------
that, at any time, 75% or more of the maximum number of shares of the Preferred
Stock which were ever outstanding shall have been converted into fully paid and
nonassessable shares of Common Stock, all of the remaining shares of Preferred
Stock shall be deemed to be converted automatically into fully paid and
nonassessable shares of Common Stock, in the manner and on the basis set forth
in this paragraph 6. Notwithstanding the foregoing, if an automatic conversion
pursuant to the preceding sentence is other than in connection with an Initial
Public Offering, then the automatic conversion of the Series C Preferred Stock
under this paragraph 6P shall take place only if more than 50% of the maximum
number of shares of Series C Preferred Stock which were ever outstanding shall
have been converted into fully paid and nonassessable shares of Common Stock.
B. COMMON STOCK
1. Relative Rights of Preferred Stock and Common Stock. All
---------------------------------------------------
preferences, voting powers, relative, participating, optional or other special
rights and privileges, and qualifications, limitations, or restrictions of the
Common Stock are expressly made subject and subordinate to those that may be
fixed with respect to any shares of the Preferred Stock.
2. Voting Rights. Except as otherwise required by law or this
-------------
Certificate of Incorporation, each holder of Common Stock shall have one vote in
respect of each share of stock held by him of record on the books of the
Corporation for the election of directors and on all matters submitted to a vote
of stockholders of the Corporation. Notwithstanding the provisions of Section
242(b)(2) of the Delaware General Corporation Law, the number of authorized
shares of Common Stock may be increased or decreased (but not below the number
of shares then outstanding) by the affirmative vote of the holders of a majority
of the outstanding shares of capital stock of the Corporation, with each such
share being entitled to such number of votes per share as is provided in this
Article FOURTH.
3. Dividends. Subject to the preferential rights of the Preferred
---------
Stock, if any, the holders of shares of Common Stock shall be entitled to
receive, when and if declared by the Board of Directors, out of the assets of
the Corporation which are by law available therefor, dividends payable either in
cash, in property or in shares of capital stock; provided, however, that the
-------- -------
Corporation shall not declare a dividend with respect to the Preferred Stock
unless the same dividend (on an as-converted basis) is declared with respect to
the Common Stock; provided,
--------
<PAGE>
-36-
however, that the Corporation shall pay any such dividends in full first to the
- -------
holders of the Preferred Stock before any such dividends are paid to the holders
of Common Stock.
4. Dissolution, Liquidation or Winding Up. In the event of any
--------------------------------------
dissolution, liquidation or winding up of the affairs of the Corporation, after
distribution in full of the preferential amounts, if any, to be distributed to
the holders of shares of the Preferred Stock, holders of Common Stock shall be
entitled, unless otherwise provided by law or this Certificate of Incorporation,
to receive all of the remaining assets of the Corporation of whatever kind
available for distribution to stockholders ratably in proportion to the number
of shares of Common Stock held by them respectively.
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
MotherNature.com, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: That the Board of Directors of MotherNature.com, Inc. (the
"Corporation"), at a meeting duly called and held on July 22, 1999, duly and
validly adopted the following resolutions:
RESOLVED: That, subject to stockholder approval, the Corporation's
Certificate of Incorporation, as amended to such date (the
"Charter"), be amended as set forth in an amendment to the Charter
substantially in the form attached hereto as Exhibit A (the
---------
"Charter Amendment").
-----------------
RESOLVED: That the Board of Directors of the Corporation deems it advisable
and in the best interests of the Corporation that the Corporation
amend the Charter as contemplated by the foregoing resolution and
the Charter Amendment is hereby recommended to the stockholders for
their approval.
RESOLVED: That the Charter Amendment be submitted to the stockholders for
their approval, and that after the approval by the stockholders,
the Chief Executive Officer and the Secretary of the Corporation
be, and each of them acting singly hereby is, authorized to execute
the Charter Amendment; and that, as promptly as practicable
thereafter, the Corporation is hereby authorized to file the
Charter Amendment with the Secretary of State of the State of
Delaware.
SECOND: That stockholders of the Corporation duly adopted such
resolutions by written consent on July 26, 1999, in accordance with the
provisions of Section 228 of the General Corporation Law of the State of
Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance with
the applicable provisions of Section 242 of the General Corporation Law of the
State of Delaware.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
-2-
IN WITNESS WHEREOF, said MotherNature.com, Inc. has caused this
certificate to be executed by Michael Barach, its President and Chief Executive
Officer, and attested to by Michael Bayer, its Treasurer and Secretary, on this
30th day of July, 1999.
MOTHERNATURE.COM, INC.
By: /s/ Michael Barach
-----------------------------
Michael Barach
President and Chief Executive Officer
ATTEST:
By: /s/ Michael Bayer
-----------------------
Michael Bayer
Treasurer and Secretary
<PAGE>
EXHIBIT A
---------
The following text shall replace the first sentence of Section 6O of
Article Fourth of the Certificate of Incorporation:
"If at any time the Corporation shall effect a public offering of
shares of Common Stock in which (i) the aggregate price paid for such
shares by the public shall be at least $20,000,000 and (ii) the price
paid by the public for such shares shall be at least $3.4180 per share
(appropriately adjusted to reflect the occurrence of any event
described in subparagraph 6F) (herein, an "Initial Public Offering"),
then effective upon the closing of the sale of such shares by the
Corporation pursuant to such public offering, all outstanding shares
of Preferred Stock shall automatically convert to shares of Common
Stock on the basis set forth in this paragraph 6, and provided,
however, that the requirement set forth in subclause (ii) shall not be
---
applicable if such registration statement is declared effective on or
before December 31, 1999."
The following text shall be inserted immediately prior to the last
sentence of Section 6A of Article Fourth of the Certificate of Incorporation:
"Notwithstanding the foregoing, the Series C Conversion Price shall be
set at $2.1116 subject to the Corporation's effecting a firm
commitment underwritten public offering which is declared effective on
or before December 31, 1999 pursuant to which the price paid by the
public for shares of the Corporation's Common Stock shall be less than
---- ----
$3.174 per share."
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
MotherNature.com, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: That the Board of Directors of MotherNature.com, Inc. (the
"Corporation"), at a meeting duly called and held on October 18, 1999, duly and
validly adopted the following resolutions:
RESOLVED: That, subject to stockholder approval, the Corporation's
Certificate of Incorporation, as amended to date (the "Charter"),
be amended as set forth in an amendment to the Charter
substantially in the form attached hereto as Exhibit A (the
---------
"Charter Amendment").
-----------------
RESOLVED: That the Board of Directors of the Corporation deems it advisable
and in the best interests of the Corporation that the Corporation
amend the Charter as contemplated by the foregoing resolution and
the Charter Amendment is hereby recommended to the stockholders for
their approval.
RESOLVED: That the Charter Amendment be submitted to the stockholders for
their approval, and that after the approval by the stockholders,
the Chief Executive Officer and the Secretary of the Corporation
be, and each of them acting singly hereby is, authorized to execute
the Charter Amendment; and that, as promptly as practicable
thereafter, the Corporation is hereby authorized to file the
Charter Amendment with the Secretary of State of the State of
Delaware.
SECOND: That stockholders of the Corporation duly adopted such
resolutions by written consent on October 29, 1999, in accordance with the
provisions of Section 228 of the General Corporation Law of the State of
Delaware.
THIRD: That the aforesaid amendment was duly adopted in
accordance with the applicable provisions of Section 242 of the General
Corporation Law of the State of Delaware.
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<PAGE>
-2-
IN WITNESS WHEREOF, said MotherNature.com, Inc. has caused this certificate
to be executed by Michael Barach, its President and Chief Executive Officer, and
attested to by Michael Bayer, its Treasurer and Secretary, on this 29th day of
October, 1999.
MOTHERNATURE.COM, INC.
By: /s/ Michael Barach
-----------------------------
Michael Barach
President and Chief Executive Officer
ATTEST:
By: /s/ Michael Bayer
-----------------------
Michael Bayer
Treasurer and Secretary
<PAGE>
Exhibit A
---------
The following text shall be inserted into the Certificate of Incorporation
to amend Section 6A of Article FOURTH so as to replace in its entirety the
sentence immediately prior to the last sentence of such paragraph with the
following sentence:
"Notwithstanding the foregoing, the Series C Conversion Price shall be
set at $1.974606 (and not subject to further adjustment) subject to
the Corporation's effecting a firm commitment underwritten public
offering which is declared effective on or before December 31, 1999
pursuant to which the price paid by the public for shares of the
Corporation's Common Stock shall be less than $3.174 per share."
---- ----
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
MotherNature.com, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: That the Board of Directors of MotherNature.com, Inc. (the
"Corporation"), at a meeting duly called and held on October 18, 1999, duly and
validly adopted the following resolutions:
RESOLVED: That, subject to stockholder approval, as promptly as practicable
after the effectiveness of the Corporation's registration statement
on Form S-1 (the "Effective Date") (or earlier at the discretion of
--------------
the Chief Executive Officer of the Corporation), the Corporation's
Certificate of Incorporation, as amended to such date (the
"Charter"), be amended as set forth in an amendment to the Charter
substantially in the form attached hereto as Exhibit A (the "Charter
--------- -------
Amendment").
---------
RESOLVED: That the Board of Directors of the Corporation deems it advisable and
in the best interests of the Corporation that the Corporation amend
the Charter as contemplated by the foregoing resolution and the
Charter Amendment is hereby recommended to the stockholders for their
approval.
RESOLVED: That the Charter Amendment be submitted to the stockholders for their
approval, and that after the approval by the stockholders, the Chief
Executive Officer and the Secretary of the Corporation be, and each
of them acting singly hereby is, authorized to execute the Charter
Amendment; and that, as promptly as practicable after the Effective
Date (or sooner as provided above), the Corporation is hereby
authorized to file the Charter Amendment with the Secretary of State
of the State of Delaware.
SECOND: That stockholders of the Corporation duly adopted such resolutions
by written consent on October 29, 1999, in accordance with the provisions of
Section 228 of the General Corporation Law of the State of Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance with
the applicable provisions of Section 242 of the General Corporation Law of the
State of Delaware.
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<PAGE>
-2-
IN WITNESS WHEREOF, said MotherNature.com, Inc. has caused this certificate
to be executed by Michael Barach, its President and Chief Executive Officer, and
attested to by Michael Bayer, its Treasurer and Secretary, on this ____ day of
______________, 1999.
MOTHERNATURE.COM, INC.
By: _____________________________________
Michael Barach
President and Chief Executive Officer
ATTEST:
By: ____________________________________________
Michael Bayer
Treasurer and Secretary
<PAGE>
Exhibit A
---------
The following text shall be inserted into the Certificate of Incorporation
at the appropriate section, such section to be determined by the President or
Treasurer in his sole and absolute discretion:
"At the same time that the filing of this Certificate of Amendment to
the Certificate of Incorporation with the Secretary of State of Delaware
becomes effective, each 7.463 shares of the Corporation's common stock,
$.01 par value, issued and outstanding immediately prior to the
effectiveness of this filing (collectively, the "Old Common Stock"), shall
be changed and combined into one (1) share of common stock, $.01 par value
(collectively, the "New Common Stock" or the "Common Stock"), with
fractional shares rounded upward to the nearest whole share. Upon the
occurrence of the automatic combination of the Old Common Stock, the
certificates representing the Old Common Stock shall be deemed cancelled
and shall not be recognized as outstanding on the books of the Corporation
for any purposes. Thereupon, each holder of Old Common Stock shall be
entitled to receive, and the Corporation's transfer agent shall be
instructed to issue to such holder, a certificate or certificates for the
number of shares of New Common Stock into which the shares of Old Common
Stock were combined."
<PAGE>
EXHIBIT 3.3
FIRST AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
MOTHERNATURE.COM, INC.
* * * * * *
I, Michael I. Barach, President of MotherNature.com, Inc. (the
"Corporation"), a corporation organized and existing under and by virtue of the
General Corporation Law of the State of Delaware, do hereby certify that the
Certificate of Incorporation of MotherNature.com, Inc., as amended, has been
further amended, and restated as amended, in accordance with provisions of
Sections 242 and 245 of the General Corporation Law of the State of Delaware,
and, as amended and restated, is set forth in its entirety as follows:
FIRST. The name of the Corporation is MotherNature.com, Inc.
SECOND. The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, Wilmington, County of New Castle,
Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD. The nature of the business or purposes to be conducted or promoted
is to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware.
FOURTH. The total number of shares of all classes of capital stock which
the Corporation shall have authority to issue is 94,300,000 shares, consisting
of 93,300,000 shares of Common Stock with a par value of $.01 per share (the
"Common Stock") and 1,000,000 shares of Preferred Stock with a par value of $.01
per share (the "Preferred Stock").
A description of the respective classes of stock and a statement of the
designations, powers, preferences and rights, and the qualifications,
limitations and restrictions of the Preferred Stock and Common Stock are as
follows:
A. COMMON STOCK
------------
1. General. All shares of Common Stock will be identical and will entitle
-------
the holders thereof to the same rights, powers and privileges. The rights,
powers and privileges of the holders of the Common Stock are subject to and
qualified by the rights of holders of the Preferred Stock.
<PAGE>
-2-
2. Dividends. Dividends may be declared and paid on the Common Stock from
---------
funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
3. Dissolution, Liquidation or Winding Up. In the event of any dissolution,
--------------------------------------
liquidation or winding up of the affairs of the Corporation, whether voluntary
or involuntary, each issued and outstanding share of Common Stock shall entitle
the holder thereof to receive an equal portion of the net assets of the
Corporation available for distribution to the holders of Common Stock, subject
to any preferential rights of any then outstanding Preferred Stock.
4. Voting Rights. Except as otherwise required by law or this Amended and
-------------
Restated Certificate of Incorporation, each holder of Common Stock shall have
one vote in respect of each share of stock held of record by such holder on the
books of the Corporation for the election of directors and on all matters
submitted to a vote of stockholders of the Corporation. Except as otherwise
required by law or provided herein, holders of Common Stock shall vote together
with holders of the Preferred Stock as a single class, subject to any special or
preferential voting rights of any then outstanding Preferred Stock. There shall
be no cumulative voting.
B. PREFERRED STOCK
---------------
The Preferred Stock may be issued in one or more series at such time or
times and for such consideration or considerations as the Board of Directors of
the Corporation may determine. Each series shall be so designated as to
distinguish the shares thereof from the shares of all other series and classes.
Except as otherwise provided in this Amended and Restated Certificate of
Incorporation, different series of Preferred Stock shall not be construed to
constitute different classes of shares for the purpose of voting by classes.
The Board of Directors is expressly authorized to provide for the issuance
of all or any shares of the undesignated Preferred Stock in one or more series,
each with such designations, preferences, voting powers (or special,
preferential or no voting powers), relative, participating, optional or other
special rights and privileges and such qualifications, limitations or
restrictions thereof as shall be stated in the resolution or resolutions adopted
by the Board of Directors to create such series, and a certificate of said
resolution or resolutions (a "Certificate of Designation") shall be filed in
accordance with the General Corporation Law of the State of Delaware. The
authority of the Board of Directors with respect to each such series shall
include, without limitation of the foregoing, the right to provide that the
shares of each such series may be: (i) subject to redemption at such time or
times and at such price or prices; (ii) entitled to receive dividends (which may
be cumulative or non-cumulative) at such rates, on such conditions, and at such
times, and payable in preference to, or in such relation to, the dividends
payable on any other class or classes or any other series; (iii) entitled to
such rights upon the dissolution of, or upon any distribution of the assets of,
the Corporation; (iv) convertible into, or exchangeable for, shares of any other
class or classes of stock, or of any other series of the same or any other class
or classes of stock of the Corporation at such price or prices or at such rates
of exchange and with such adjustments, if any; (v) entitled to the benefit of
such limitations, if any,
<PAGE>
-3-
on the issuance of additional shares of such series or shares of any other
series of Preferred Stock; or (vi) entitled to such other preferences, powers,
qualifications, rights and privileges, all as the Board of Directors may deem
advisable and as are not inconsistent with law and the provisions of this
Amended and Restated Certificate of Incorporation.
FIFTH. The Corporation is to have perpetual existence.
SIXTH. The following provisions are included for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its Board of Directors and stockholders:
1. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors of the Corporation.
2. The Board of Directors of the Corporation is expressly authorized
to adopt, amend or repeal the By-laws of the Corporation, subject to any
limitation thereof contained in the By-laws. The stockholders shall also have
the power to adopt, amend or repeal the By-laws of the Corporation; provided,
--------
however, that, in addition to any vote of the holders of any class or series of
- -------
stock of the Corporation required by law or by this Amended and Restated
Certificate of Incorporation, the affirmative vote of the holders of at least
seventy-five percent (75%) of the voting power of all of the then outstanding
shares of the capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
adopt, amend or repeal any provision of the By-laws of the Corporation.
3. Stockholders of the Corporation may not take any action by written
consent in lieu of a meeting.
4. Special meetings of stockholders may be called at any time only by
the President, the Chairman of the Board of Directors (if any) or a majority of
the Board of Directors. Business transacted at any special meeting of
stockholders shall be limited to matters relating to the purpose or purposes
stated in the notice of meeting.
5. The books of the Corporation may be kept at such place within or
without the State of Delaware as the By-laws of the Corporation may provide or
as may be designated from time to time by the Board of Directors of the
Corporation.
SEVENTH.
1. Number of Directors. The number of directors which shall constitute
-------------------
the whole Board of Directors shall be determined by resolution of a majority of
the Board of Directors, but in no event shall the number of directors be less
than three. The number of directors may be decreased at any time and from time
to time by a majority of the directors then in office, but only to eliminate
vacancies existing by reason of the death, resignation, removal or expiration of
the term of one or more directors. The directors shall be elected at the annual
meeting of
<PAGE>
-4-
stockholders by such stockholders as have the right to vote on such election.
Directors need not be stockholders of the Corporation.
2. Election of Directors. Elections of directors need not be by written
---------------------
ballot except as and to the extent provided in the By-laws of the Corporation.
3. Tenure. Notwithstanding any provisions to the contrary contained
------
herein, each director shall hold office until his or her successor is elected
and qualified, or until his or her earlier death, resignation or removal.
4. Vacancies. Unless and until filled by the stockholders, any vacancy in
---------
the Board of Directors, however occurring, including a vacancy resulting from an
enlargement of the Board of Directors, may be filled only by vote of a majority
of the directors then in office, even if less than a quorum, or by a sole
remaining director. A director elected to fill a vacancy shall be elected for
the unexpired term of his or her predecessor in office, if applicable, and a
director chosen to fill a position resulting from an increase in the number of
directors shall hold office until the next election of the class for which such
director shall have been chosen and until his or her successor is elected and
qualified, or until his or her earlier death, resignation or removal.
5. Quorum. A majority of the total number of the whole Board of Directors
------
shall constitute a quorum at all meetings of the Board of Directors. In the
event one or more of the directors shall be disqualified to vote at any meeting,
then the required quorum shall be reduced by one for each such director so
disqualified; provided, however, that in no case shall less than one-third (1/3)
of the number so fixed constitute a quorum. In the absence of a quorum at any
such meeting, a majority of the directors present may adjourn the meeting from
time to time without further notice other than announcement at the meeting,
until a quorum shall be present.
6. Action at Meeting. At any meeting of the Board of Directors at which a
-----------------
quorum is present, the vote of a majority of those present shall be sufficient
to take any action, unless a different vote is specified by law or the
Corporation's By-laws.
7. Removal. Any one or more or all of the directors may be removed with
-------
cause only by the holders of at least seventy-five percent (75%) of the shares
then entitled to vote at an election of directors.
8. Stockholder Nominations and Introduction of Business, Etc. Advance
----------------------------------------------------------
notice of stockholder nominations for election of directors and other business
to be brought by stockholders before a meeting of stockholders shall be given in
the manner provided in the By-laws of the Corporation.
9. Rights of Preferred Stock. The provisions of this Article are subject
-------------------------
to the rights of the holders of any series of Preferred Stock from time to time
outstanding.
EIGHTH. No director (including any advisory director) of the Corporation
shall be personally liable to the Corporation or its stockholders for monetary
damages for breach of
<PAGE>
-5-
fiduciary duty as a director notwithstanding any provision of law imposing such
liability; provided, however, that, to the extent provided by applicable law,
this provision shall not eliminate the liability of a director (i) for any
breach of the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the General
Corporation Law of the State of Delaware, or (iv) for any transaction from which
the director derived an improper personal benefit. No amendment to or repeal of
this provision 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 of such
director occurring prior to such amendment or repeal.
NINTH. The Board of Directors of the Corporation, when evaluating any offer
of another party (a) to make a tender or exchange offer for any equity security
of the Corporation or (b) to effect a business combination, shall, in connection
with the exercise of its judgment in determining what is in the best interests
of the Corporation as whole, be authorized to give due consideration to any such
factors as the Board of Directors determines to be relevant, including, without
limitation:
(i) the interests of the Corporation's stockholders, including the
possibility that these interests might be best served by the continued
independence of the Corporation;
(ii) whether the proposed transaction might violate federal or state laws;
(iii) not only the consideration being offered in the proposed transaction,
in relation to the then current market price for the outstanding capital
stock of the Corporation, but also to the market price for the capital stock
of the Corporation over a period of years, the estimated price that might be
achieved in a negotiated sale of the Corporation as a whole or in part or
through orderly liquidation, the premiums over market price for the
securities of other corporations in similar transactions, current political,
economic and other factors bearing on securities prices and the Corporation's
financial condition and future prospects; and
(iv) the social, legal and economic effects upon employees, suppliers,
customers, creditors and others having similar relationships with the
Corporation, upon the communities in which the Corporation conducts its
business and upon the economy of the state, region and nation.
In connection with any such evaluation, the Board of Directors is authorized to
conduct such investigations and engage in such legal proceedings as the Board of
Directors may determine.
TENTH. The Corporation reserves the right to amend or repeal any provision
contained in this Amended and Restated Certificate of Incorporation in the
manner prescribed by the laws of the State of Delaware and all rights conferred
upon stockholders are granted subject to this reservation, provided, however,
-------- -------
that in addition to any vote of the holders of any class or series of stock of
the Corporation required by law, this Amended and Restated Certificate of
Incorporation or a Certificate of Designation with respect to a series of
Preferred Stock, the affirmative vote of the holders of shares of voting stock
of the Corporation representing at least seventy-five percent
<PAGE>
-6-
(75%) of the voting power of all of the then outstanding shares of the capital
stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to (i) reduce or
eliminate the number of authorized shares of Common Stock or the number of
authorized shares of Preferred Stock set forth in Article FOURTH or (ii) amend
or repeal, or adopt any provision inconsistent with, Parts A and B of Article
FOURTH and Articles FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH and this Article TENTH
of this Amended and Restated Certificate of Incorporation.
IN WITNESS WHEREOF, the undersigned has hereunto signed his name and
affirms that the statements made in this Amended and Restated Certificate of
Incorporation are true under the penalties of perjury this ____ day of ____,
1999.
_____________________________________
Michael I. Barach
President and Chief Executive Officer
<PAGE>
EXHIBIT 3.5
____________________________________________________
AMENDED AND RESTATED
BY-LAWS
OF
MOTHERNATURE.COM, INC.
____________________________________________________
<PAGE>
BY-LAWS
-------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1 - Stockholders............................................................
Section 1.1 Place of Meetings...............................................
Section 1.2 Annual Meeting..................................................
Section 1.3 Special Meetings................................................
Section 1.4 Notice of Meetings..............................................
Section 1.5 Voting List.....................................................
Section 1.6 Quorum..........................................................
Section 1.7 Adjournments....................................................
Section 1.8 Voting and Proxies..............................................
Section 1.9 Action at Meeting...............................................
Section 1.10 Introduction of Business at Meeting.............................
Section 1.11 Action without Meeting..........................................
ARTICLE 2 - Directors...............................................................
Section 2.1 General Powers..................................................
Section 2.2 Number; Election and Qualification..............................
Section 2.3 [Intentionally Omitted].........................................
Section 2.4 [Intentionally Omitted].........................................
Section 2.5 [Intentionally Omitted].........................................
Section 2.6 Tenure..........................................................
Section 2.7 Vacancies.......................................................
Section 2.8 Resignation.....................................................
Section 2.9 Regular Meetings................................................
Section 2.10 Special Meetings................................................
Section 2.11 Notice of Special Meetings......................................
Section 2.12 Meetings by Telephone Conference Calls..........................
Section 2.13 Quorum..........................................................
Section 2.14 Action at Meeting...............................................
Section 2.15 Action by Consent...............................................
Section 2.16 Removal.........................................................
Section 2.17 Committees......................................................
Section 2.18 Compensation of Directors.......................................
Section 2.19 Amendments to Article...........................................
</TABLE>
<PAGE>
-ii-
<TABLE>
<S> <C>
ARTICLE 3 - Officers................................................................
Section 3.1 Enumeration......................................................
Section 3.2 Election.........................................................
Section 3.3 Qualification....................................................
Section 3.4 Tenure...........................................................
Section 3.5 Resignation and Removal..........................................
Section 3.6 Vacancies........................................................
Section 3.7 Chairman of the Board and Vice-
Chairman of the Board...........................................
Section 3.8 President........................................................
Section 3.9 Vice Presidents..................................................
Section 3.10 Secretary and Assistant Secretaries..............................
Section 3.11 Treasurer and Assistant Treasurers...............................
Section 3.12 Salaries.........................................................
Section 3.13 Action with Respect to Securities of
Other Corporations..............................................
ARTICLE 4 - Capital Stock...........................................................
Section 4.1 Issuance of Stock................................................
Section 4.2 Certificates of Stock............................................
Section 4.3 Transfers........................................................
Section 4.4 Lost, Stolen or Destroyed Certificates...........................
Section 4.5 Record Date......................................................
ARTICLE 5 - General Provisions......................................................
Section 5.1 Fiscal Year......................................................
Section 5.2 Corporate Seal...................................................
Section 5.3 Notices..........................................................
Section 5.4 Waiver of Notice.................................................
Section 5.5 Evidence of Authority............................................
Section 5.6 Facsimile Signatures.............................................
Section 5.7 Reliance upon Books, Reports and Records.........................
Section 5.8 Time Periods.....................................................
Section 5.9 Certificate of Incorporation.....................................
Section 5.10 Transactions with Interested Parties.............................
Section 5.11 Severability.....................................................
Section 5.12 Pronouns.........................................................
ARTICLE 6 - Amendments..............................................................
Section 6.1 By the Board of Directors........................................
Section 6.2 By the Stockholders..............................................
</TABLE>
<PAGE>
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<TABLE>
<S> <C>
ARTICLE 7 - Indemnification.........................................................
Section 7.1 Actions Other Than by or in the Right
of the Corporation.............................................
Section 7.2 Actions by or in the Right of the Corporation...................
Section 7.3 Success in Merits...............................................
Section 7.4 Authorization...................................................
Section 7.5 Expense Advance.................................................
Section 7.6 Nonexclusivity..................................................
Section 7.7 Insurance.......................................................
Section 7.8 "The Corporation"...............................................
Section 7.9 Other Indemnification...........................................
Section 7.10 Other Definitions...............................................
Section 7.11 Continuation of Indemnification.................................
</TABLE>
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
MOTHERNATURE.COM, INC. (the "Corporation")
ARTICLE 1 - Stockholders
------------------------
1.1 Place of Meetings. All meetings of stockholders shall be held at such
-----------------
place within or without the State of Delaware as may be designated from time to
time by the Chairman of the Board (if any), the board of directors of the
Corporation (the "Board of Directors") or the President or, if not so
designated, at the registered office of the Corporation.
1.2 Annual Meeting. The annual meeting of stockholders for the election
--------------
of directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on a date to be fixed by the Chairman
of the Board (if any), Board of Directors or the President (which date shall not
be a legal holiday in the place where the meeting is to be held) at the time and
place to be fixed by the Chairman of the Board, the Board of Directors or the
President and stated in the notice of the meeting.
1.3 Special Meetings. Special meetings of stockholders may be called at
----------------
any time by the Chairman of the Board (if any), a majority of the Board of
Directors or the President and shall be held at such place, on such date and at
such time as shall be fixed by the Board of Directors or the person calling the
meeting. Business transacted at any special meeting of stockholders shall be
limited to matters relating to the purpose or purposes stated in the notice of
meeting.
1.4 Notice of Meetings. Except as otherwise provided by law, written
------------------
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his or her address as it appears
on the records of the Corporation.
1.5 Voting List. The officer who has charge of the stock ledger of the
-----------
Corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at
<PAGE>
-2-
the place where the meeting is to be held. The list shall also be produced and
kept at the time and place of the meeting during the whole time of the meeting,
and may be inspected by any stockholder who is present. This list shall
presumptively determine the identity of the stockholders entitled to vote at the
meeting and the number of shares held by each of them.
1.6 Quorum. Except as otherwise provided by law, the Certificate of
------
Incorporation or these By-Laws, the holders of a majority of the shares of the
capital stock of the Corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business. Shares held by brokers which such
brokers are prohibited from voting (pursuant to their discretionary authority on
behalf of beneficial owners of such shares who have not submitted a proxy with
respect to such shares) on some or all of the matters before the stockholders,
but which shares would otherwise be entitled to vote at the meeting ("Broker
Non-Votes") shall be counted, for the purpose of determining the presence or
absence of a quorum, both (a) toward the total voting power of the shares of
capital stock of the Corporation and (b) as being represented by proxy. If a
quorum has been established for the purpose of conducting the meeting, a quorum
shall be deemed to be present for the purpose of all votes to be conducted at
such meeting, provided that where a separate vote by a class or classes, or
series thereof, is required, a majority of the voting power of the shares of
such class or classes, or series, present in person or represented by proxy
shall constitute a quorum entitled to take action with respect to that vote on
that matter. If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the voting power of the shares of stock
entitled to vote who are present, in person or by proxy, may adjourn the meeting
to another place, date, or time.
1.7 Adjournments. Any meeting of stockholders may be adjourned to any
------------
other time and to any other place at which a meeting of stockholders may be held
under these By-Laws by the stockholders present or represented at the meeting
and entitled to vote, although less than a quorum, or, if no stockholder is
present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the Corporation may transact any business which might have
been transacted at the original meeting.
1.8 Voting and Proxies. At any meeting of the stockholders, each
------------------
stockholder shall have one vote for each share of stock entitled to vote at such
meeting held of record by such stockholder and a proportionate vote for each
fractional share so held, unless otherwise provided in the Certificate of
Incorporation. Each stockholder of record entitled to vote at a meeting of
stockholders, or to express consent or dissent to corporate action in writing
without a meeting (to the extent not otherwise prohibited by the Certificate of
Incorporation or these By-laws), may vote or express such consent or dissent in
person or may authorize another person or persons to vote or act for such
stockholder by written proxy executed by such stockholder or his or her
authorized agent or by a transmission permitted by law and delivered to the
Secretary of the Corporation. No such proxy shall be voted or acted upon after
three years from the date of its execution, unless the proxy expressly provides
for a longer period. Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this Section 1.8
may be substituted or used in lieu of the original writing or transmission for
any and all purposes for which the original writing or transmission could be
used,
<PAGE>
-3-
provided that such copy, facsimile telecommunication or reproduction shall be a
complete reproduction of the entire original writing or transmission.
In the election of directors, voting shall be by written ballot, and for
any other action, voting need not be by ballot.
The Corporation may, and to the extent required by law or the Certificate
of Incorporation, shall, in advance of any meeting of stockholders, appoint one
or more inspectors to act at such meeting and make a written report thereof. The
Corporation may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. If no inspector or alternate is able to act at a
meeting of stockholders, the person presiding at such meeting may, and to the
extent required by law or the Certificate of Incorporation, shall, appoint one
or more inspectors to act at such meeting. Each inspector, before entering upon
the discharge of his duties, shall take and sign an oath faithfully to execute
the duties of inspector with strict impartiality and according to the best of
his or her ability.
1.9 Action at Meeting. When a quorum is present at any meeting of
-----------------
stockholders, the holders of a majority of the stock present or represented and
voting on a matter (or if there are two or more classes of stock entitled to
vote as separate classes, then in the case of each such class, the holders of a
majority of the stock of that class present or represented and voting on such
matter) shall decide any matter to be voted upon by the stockholders at such
meeting (other than the election of directors), except when a different vote is
required by express provision of law, the Certificate of Incorporation or these
By-Laws. Any election of directors by the stockholders shall be determined by a
plurality of the votes cast by the stockholders entitled to vote at such
election, except as otherwise provided by the Certificate of Incorporation. For
the purposes of this paragraph, Broker Non-Votes represented at the meeting but
not permitted to vote on a particular matter shall not be counted, with respect
to the vote on such matter, in the number of (a) votes cast, (b) votes cast
affirmatively, or (c) votes cast negatively.
1.10 Introduction of Business at Meetings.
A. Annual Meetings of Stockholders.
-------------------------------
(1) Nominations of persons for election to the Board of
Directors and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (a)
pursuant to the Corporation's notice of meeting, (b) by or at the
direction of the Board of Directors or (c) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of
notice provided for in this Section 1.10, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in this
Section 1.10.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of
paragraph (A)(1) of this Section 1.10, the stockholder must have given
timely notice thereof in writing to the Secretary of the Corporation and
such other business must otherwise be a proper matter for stockholder
action. To be timely, a stockholder's notice shall be delivered to the
Secretary at the principal executive offices of the Corporation not later
than the close of business on the one hundred
<PAGE>
-4-
twentieth (120th) day nor earlier than the close of business on the one
hundred fiftieth (150th) day prior to the first anniversary of the date
of the proxy statement delivered to stockholders in connection with the
preceding year's annual meeting; provided, however, that if either (i)
the date of the annual meeting is more than thirty (30) days before or
more than sixty (60) days after such an anniversary date or (ii) no proxy
statement was delivered to stockholders in connection with the preceding
year's annual meeting, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the ninetieth (90th)
day prior to such annual meeting and not later than the close of business
on the later of the sixtieth (60th) day prior to such annual meeting or
the close of business on the tenth (10th) day following the day on which
public announcement of the date of such meeting is first made by the
Corporation. Such stockholder's notice shall set forth (a) as to each
person whom the stockholder proposes to nominate for election or
reelection as a director, all information relating to such person that is
required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected);
(b) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at
the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the
proposal is made; and (c) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is
made (i) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (ii) the class and
number of shares of capital stock of the Corporation that are owned
beneficially and held of record by such stockholder and such beneficial
owner.
(3) Notwithstanding anything in the second sentence of paragraph
(A)(2) of this Section 1.10 to the contrary, in the event that the number
of directors to be elected to the Board of Directors of the Corporation
is increased and there is no public announcement by the Corporation
naming all of the nominees for director or specifying the size of the
increased Board of Directors at least seventy (70) days prior to the
first anniversary of the preceding year's annual meeting (or, if the
annual meeting is held more than thirty (30) days before or sixty (60)
days after such anniversary date, at least seventy (70) days prior to
such annual meeting), a stockholder's notice required by this Section
1.10 shall also be considered timely, but only with respect to nominees
for any new positions created by such increase, if it shall be delivered
to the Secretary at the principal executive office of the Corporation not
later than the close of business on the tenth (10th) day following the
day on which such public announcement is first made by the Corporation.
B. Special Meetings of Stockholders. Only such business shall be
--------------------------------
conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting.
Nominations of persons for election to the Board of Directors may be made
at a special meeting of stockholders at which directors are to be elected
pursuant to the Corporation's notice of meeting (a) by or at the
direction of the Board of Directors or (b) provided that the Board of
Directors has determined that directors shall be
<PAGE>
-5-
elected at such meeting, by any stockholder of the Corporation who is a
stockholder of record at the time of giving of notice of the special
meeting, who shall be entitled to vote at the meeting and who complies
with the notice procedures set forth in this Section 1.10. If the
Corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any such
stockholder may nominate a person or persons (as the case may be), for
election to such position(s) as specified in the Corporation's notice of
meeting, if the stockholder's notice required by paragraph (A)(2) of this
Section 1.10 shall be delivered to the Secretary at the principal
executive offices of the Corporation not earlier than the ninetieth
(90th) day prior to such special meeting nor later than the later of (x)
the close of business on the sixtieth (60th) day prior to such special
meeting or (y) the close of business on the tenth (10th) day following
the day on which public announcement is first made of the date of such
special meeting and of the nominees proposed by the Board of Directors to
be elected at such meeting.
C. General.
-------
(1) Only such persons who are nominated in accordance with the
procedures set forth in this Section 1.10 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance
with the procedures set forth in this Section 1.10. Except as otherwise
provided by law, the Certificate of Incorporation or these By-Laws, the
chairman of the meeting shall have the power and duty to determine
whether a nomination or any business proposed to be brought before the
meeting was made or proposed, as the case may be, in accordance with the
procedures set forth in this Section 1.10 and, if any proposed nomination
or business is not in compliance herewith, to declare that such defective
proposal or nomination shall be disregarded.
(2) For purposes of this Section 1.10, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and
Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange
Act.
(3) Notwithstanding the foregoing provisions of this Section
1.10, a stockholder shall also comply with all applicable requirements of
the Exchange Act and the rules and regulations thereunder with respect to
the matters set forth herein. Nothing in this Section 1.10 shall be
deemed to affect any rights (i) of stockholders to request inclusion of
proposals in the Corporation's proxy statement pursuant to Rule 14a-8
under the Exchange Act or (ii) of the holders of any series of Preferred
Stock to elect directors under specified circumstances.
1.11 Action without Meeting. Stockholders of the Corporation may not take
----------------------
any action by written consent in lieu of a meeting. Notwithstanding any other
provision of law, the Certificate of Incorporation or these By-Laws, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of at least seventy-five percent (75%) of the
votes which all
<PAGE>
-6-
the stockholders would be entitled to cast at any annual election of directors
or class of directors shall be required to amend or repeal, or to adopt any
provision inconsistent with, this Section 1.11.
ARTICLE 2 - Directors
---------------------
2.1 General Powers. The business and affairs of the Corporation shall be
--------------
managed by or under the direction of a Board of Directors, who may exercise all
of the powers of the Corporation except as otherwise provided by law or the
Certificate of Incorporation. In the event of a vacancy in the Board of
Directors, the remaining directors, except as otherwise provided by law or the
Certificate of Incorporation, may exercise the powers of the full Board of
Directors until the vacancy is filled. Without limiting the foregoing, the Board
of Directors may:
(a) declare dividends from time to time in accordance with law;
(b) purchase or otherwise acquire any property, rights or privileges on
such terms as it shall determine;
(c) authorize the creation, making and issuance, in such form as it may
determine, of written obligations of every kind, negotiable or non-
negotiable, secured or unsecured, to borrow funds and guarantee obligations,
and to do all things necessary in connection therewith;
(d) remove any officer of the Corporation with or without cause, and from
time to time to devolve the powers and duties of any officer upon any other
person for the time being;
(e) confer upon any officer of the Corporation the power to appoint,
remove and suspend subordinate officers, employees and agents;
(f) adopt from time to time such stock option, stock purchase, bonus or
other compensation plans for directors, officers, employees, consultants and
agents of the Corporation and its subsidiaries as it may determine;
(g) adopt from time to time such insurance, retirement, and other benefit
plans for directors, officers, employees, consultants and agents of the
Corporation and its subsidiaries as it may determine; and
(h) adopt from time to time regulations, not inconsistent herewith, for
the management of the Corporation's business and affairs.
2.2 Number; Election and Qualification. The number of directors which
----------------------------------
shall constitute the whole Board of Directors shall be determined by resolution
of the Board of Directors, but in no event shall be less than three. The number
of directors may be decreased at any time and from time to time by a majority of
the directors then in office, but only to eliminate vacancies existing by reason
of the death, resignation, removal or expiration of the term of one or more
directors. The directors shall be elected at the annual meeting of stockholders
(or, if so determined by the Board of Directors pursuant to Section 10
<PAGE>
-7-
hereof, at a special meeting of stockholders), by such stockholders as have the
right to vote on such election. Directors need not be stockholders of the
Corporation.
2.3 [Intentionally Omitted].
-----------------------
2.4 [Intentionally Omitted].
-----------------------
2.5 [Intentionally Omitted].
-----------------------
2.6 Tenure. Notwithstanding any provisions to the contrary contained
------
herein, each director shall hold office until his or her successor is elected
and qualified, or until his or her earlier death, resignation or removal.
2.7 Vacancies. Unless and until filled by the stockholders, any vacancy
---------
in the Board of Directors, however occurring, including a vacancy resulting from
an enlargement thereof, may be filled by vote of a majority of the directors
then in office, although less than a quorum, or by a sole remaining director. A
director elected to fill a vacancy shall be elected for the unexpired term of
his or her predecessor in office, if any, and a director chosen to fill a
position resulting from an increase in the number of directors shall hold office
until the next election of directors and until his or her successor is elected
and qualified, or until his or her earlier death, resignation or removal.
2.8 Resignation. Any director may resign by delivering his or her written
-----------
resignation to the Corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
2.9 Regular Meetings. Regular meetings of the Board of Directors may be
----------------
held without notice at such time and place, either within or without the State
of Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination. A regular meeting of the Board of
Directors may be held without notice immediately after and at the same place as
the annual meeting of stockholders. Regular meetings of the Board of Directors
shall be held at such place or places, on such date or dates, and at such time
or times as shall have been established by the Board of Directors and publicized
among all directors. A notice of each regular meeting shall not be required.
2.10 Special Meetings. Special meetings of the Board of Directors may be
----------------
held at any time and place, within or without the State of Delaware, designated
in a call by the Chairman of the Board (if any), the President, two or more
directors, or by one director in the event that there is only a single director
in office.
2.11 Notice of Special Meetings. Notice of any special meeting of
--------------------------
directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director (i) by giving notice to such director in person or by telephone at
least 48 hours in advance of the meeting, (ii) by sending a telegram or
delivering written notice by facsimile transmission or by hand, to his or her
last known business or home address at least 48 hours in advance
<PAGE>
-8-
of the meeting, or (iii) by mailing written notice to his or her last known
business or home address at least 72 hours in advance of the meeting. A notice
or waiver of notice of a meeting of the Board of Directors need not specify the
purposes of the meeting.
2.12 Meetings by Telephone Conference Calls. Directors or any members of
--------------------------------------
any committee designated by the Board of Directors may participate in a meeting
of the Board of Directors or such 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 by such means shall be deemed
to constitute presence in person at such meeting.
2.13 Quorum. A majority of the total number of the whole Board of
------
Directors shall constitute a quorum at all meetings of the Board of Directors.
In the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each such director
so disqualified; provided, however, that in no case shall less than one-third
(1/3) of the total number of the whole Board of Directors constitute a quorum.
In the absence of a quorum at any such meeting, a majority of the directors
present may adjourn the meeting from time to time without further notice other
than announcement at the meeting, until a quorum shall be present.
2.14 Action at Meeting. At any meeting of the Board of Directors at which
-----------------
a quorum is present, the vote of a majority of those present shall be sufficient
to take any action, unless a different vote is specified by law, the Certificate
of Incorporation or these By-Laws.
2.15 Action by Written Consent. Any action required or permitted to be
-------------------------
taken at any meeting of the Board of Directors or of any committee of the Board
of Directors may be taken without a meeting, if all members of the Board of
Directors or committee, as the case may be, consent to such action in writing,
and the written consents are filed with the minutes of proceedings of the Board
of Directors or committee.
2.16 Removal. Unless otherwise provided in the Certificate of
-------
Incorporation, any one or more or all of the directors may be removed, only for
cause, by the holders of at least seventy-five percent (75%) of the shares then
entitled to vote at an election of directors.
2.17 Committees. The Board of Directors may, by resolution passed by a
----------
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. The Board of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
such committee. In the absence or disqualification of a member of a committee,
the member or members of such committee present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at such meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors
and subject to the provisions of the General Corporation Law of the State of
Delaware, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation
and may authorize the seal of the Corporation to be affixed to all papers which
may require it. Each such committee shall keep minutes and make such reports as
the Board of Directors may from time to time
<PAGE>
-9-
request. Except as the Board of Directors may otherwise determine or as provided
herein, any committee may make rules for the conduct of its business, but unless
otherwise provided by the directors or in such rules, its business shall be
conducted as nearly as possible in the same manner as is provided in these By-
Laws for the Board of Directors. Adequate provisions shall be made for notice to
members of all meeting of committees. One-third (1/3) of the members of any
committee shall constitute a quorum unless the committee shall consist of one
(1) or two (2) members, in which event one (1) member shall constitute a quorum;
and all matters shall be determined by a majority vote of the members present.
Action may be taken by any committee without a meeting if all members thereof
consent thereto in writing, and the writing or writings are filed with the
minutes of the proceedings of such committee.
2.18 Compensation of Directors. Directors may be paid such compensation
-------------------------
for their services and such reimbursement for expenses of attendance at meetings
as the Board of Directors may from time to time determine. No such payment shall
preclude any director from serving the Corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.
2.19 Amendments to Article. Notwithstanding any other provisions of law,
---------------------
the Certificate of Incorporation or these By-Laws, and notwithstanding the fact
that a lesser percentage may be specified by law, the affirmative vote of the
holders of a least seventy-five percent (75%) of the votes which all the
stockholders would be entitled to cast at any annual election of directors or
class of directors shall be required to amend or repeal, or to adopt any
provision inconsistent with, this Article 2.
ARTICLE 3 - Officers
--------------------
3.1 Enumeration. The officers of the Corporation shall consist of a
-----------
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including, but not limited to,
a Chairman of the Board, a Vice-Chairman of the Board, and one or more Vice
Presidents, Assistant Treasurers and Assistant Secretaries. The Board of
Directors may appoint such other officers as it may deem appropriate.
3.2 Election. The President, Treasurer and Secretary shall be elected
--------
annually by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.
3.3 Qualification. No officer need be a stockholder. Any two or more
-------------
offices may be held by the same person.
3.4 Tenure. Except as otherwise provided by law, by the Certificate of
------
Incorporation or by these By-Laws, each officer shall hold office until his or
her successor is elected and qualified, unless a different term is specified in
the vote choosing or appointing such officer, or until his or her earlier death,
resignation or removal.
<PAGE>
-10-
3.5 Resignation and Removal. Any officer may resign by delivering his or
-----------------------
her written resignation to the Chairman of the Board (if any), to the Board of
Directors at a meeting thereof, to the Corporation at its principal office or to
the President or Secretary. Such resignation shall be effective upon receipt
unless it is specified to be effective at some other time or upon the happening
of some other event.
Any officer may be removed at any time, with or without cause, by vote of a
majority of the entire number of directors then in office.
Except as the Board of Directors may otherwise determine, no officer who
resigns or is removed shall have any right to any compensation as an officer for
any period following his or her resignation or removal, or any right to damages
on account of such removal, whether his or her compensation be by the month or
by the year or otherwise, unless such compensation is expressly provided in a
duly authorized written agreement with the Corporation.
3.6 Vacancies. The Board of Directors may fill any vacancy occurring in
---------
any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his predecessor and until his or her successor is elected and qualified, or
until his or her earlier death, resignation or removal.
3.7 Chairman of the Board and Vice-Chairman of the Board. The Chairman of
----------------------------------------------------
the Board, if any, shall preside at all meetings of the Board of Directors and
stockholders at which he or she is present and shall perform such duties and
possess such powers as are designated by the Board of Directors. If the Board of
Directors appoints a Vice-Chairman of the Board, he or she shall, in the absence
or disability of the Chairman of the Board, perform the duties and exercise the
powers of the Chairman of the Board and shall perform such other duties and
possess such other powers as may from time to time be designated by the Board of
Directors.
3.8 President. The President shall, subject to the direction of the Board
---------
of Directors, have general charge and supervision of the business of the
Corporation. Unless otherwise provided by the Board of Directors, and provided
that there is no Chairman of the Board or that the Chairman and Vice-Chairman,
if any, are not available, the President shall preside at all meetings of the
stockholders, and, if a director, at all meetings of the Board of Directors.
Unless the Board of Directors has designated another officer as the Chief
Executive Officer, the President shall be the Chief Executive Officer of the
Corporation. The President shall perform such other duties and shall have such
other powers as the Board of Directors may from time to time prescribe. The
President shall have the power to enter into contracts and otherwise bind the
Corporation in matters arising in the ordinary course of the Corporation's
business.
3.9 Vice Presidents. Any Vice President shall perform such duties and
---------------
possess such powers as the Board of Directors or the President may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and, when so performing, shall have all the powers of
and be subject to all the restrictions upon the
<PAGE>
-11-
President. The Board of Directors may assign to any Vice President the title of
Executive Vice President, Senior Vice President or any other title selected by
the Board of Directors. Unless otherwise determined by the Board of Directors,
any Vice President shall have the power to enter into contracts and otherwise
bind the Corporation in matters arising in the ordinary course of the
Corporation's business.
3.10 Secretary and Assistant Secretaries. The Secretary shall perform
-----------------------------------
such duties and shall have such powers as the Board of Directors or the
President may from time to time prescribe. In addition, the Secretary shall
perform such duties and have such powers as are incident to the office of
secretary, including without limitation the duty and power to give notices of
all meetings of stockholders and special meetings of the Board of Directors, to
attend all meetings of stockholders and the Board of Directors and keep a record
of the proceedings, to maintain a stock ledger and prepare lists of stockholders
and their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such powers
as the Board of Directors, the President or the Secretary may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Secretary, the Assistant Secretary (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any meeting
of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.11 Treasurer and Assistant Treasurers. The Treasurer shall perform such
----------------------------------
duties and shall have such powers as the Board of Directors or the President may
from time to time prescribe. In addition, the Treasurer shall perform such
duties and have such powers as are incident to the office of treasurer,
including without limitation the duty and power to keep and be responsible for
all funds and securities of the Corporation, to deposit funds of the Corporation
in depositories selected in accordance with these By-Laws, to disburse such
funds as ordered by the Board of Directors, to make proper accounts for such
funds, and to render as required by the Board of Directors statements of all
such transactions and of the financial condition of the Corporation.
The Assistant Treasurers shall perform such duties and possess such powers
as the Board of Directors, the President or the Treasurer may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Treasurer, the Assistant Treasurer (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.
3.12 Salaries. Officers of the Corporation shall be entitled to such
--------
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
3.13 Action with Respect to Securities of Other Corporations. Unless
-------------------------------------------------------
otherwise directed by the Board of Directors, the President or any officer of
the Corporation authorized by the President
<PAGE>
-12-
shall have power to vote and otherwise act on behalf of the Corporation, in
person or by proxy, at any meeting of stockholders of or with respect to any
action of stockholders of any other corporation in which the Corporation may
hold securities and otherwise to exercise any and all rights and powers which
this Corporation may possess by reason of its ownership of securities in such
other corporation.
ARTICLE 4 - Capital Stock
-------------------------
4.1 Issuance of Stock. Unless otherwise voted by the stockholders and
-----------------
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the Corporation
or the whole or any part of any issued, authorized capital stock of the
Corporation held in its treasury may be issued, sold, transferred or otherwise
disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 Certificates of Stock. Every holder of stock of the Corporation shall
---------------------
be entitled to have a certificate, in such form as may be prescribed by law and
by the Board of Directors, certifying the number and class of shares owned by
such stockholder in the Corporation. Each such certificate shall be signed by,
or in the name of the Corporation by, the Chairman or Vice-Chairman, if any, of
the Board of Directors, or the President or a Vice President, and the Treasurer
or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation. Any or all of the signatures on such certificate may be a
facsimile.
Each certificate for shares of stock which are subject to any restriction
on transfer pursuant to the Certificate of Incorporation, the By-Laws,
applicable securities laws or any agreement among any number of shareholders or
among such holders and the Corporation shall have conspicuously noted on the
face or back of such certificate either the full text of such restriction or a
statement of the existence of such restriction.
4.3 Transfers. Except as otherwise established by rules and regulations
---------
adopted by the Board of Directors, and subject to applicable law, shares of
stock may be transferred on the books of the Corporation by the surrender to the
Corporation or its transfer agent of the certificate representing such shares,
properly endorsed or accompanied by a written assignment or power of attorney
properly executed, and with such proof of authority or the authenticity of
signature as the Corporation or its transfer agent may reasonably require.
Except as may be otherwise required by law, by the Certificate of Incorporation
or by these By-Laws, the Corporation shall be entitled to treat the record
holder of stock as shown on its books as the owner of such stock for all
purposes, including the payment of dividends and the right to vote with respect
to such stock, regardless of any transfer, pledge or other disposition of such
stock, until the shares have been transferred on the books of the Corporation in
accordance with the requirements of these By-Laws.
4.4 Lost, Stolen or Destroyed Certificates. The Corporation may issue a
--------------------------------------
new certificate of stock in place of any previously issued certificate alleged
to have been lost, stolen, or destroyed, upon such terms and conditions as the
President may prescribe, including the presentation of reasonable
<PAGE>
-13-
evidence of such loss, theft or destruction and the giving of such indemnity as
the President may require for the protection of the Corporation or any transfer
agent or registrar.
4.5 Record Date. The Board of Directors may fix in advance a date as a
-----------
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or, to the extent permitted by the
Certificate of Incorporation and these By-laws, to express consent (or dissent)
to corporate action in writing without a meeting, or entitled to receive payment
of any dividend or other distribution or allotment of any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action. Such record date shall not be more than 60 nor less than 10 days
before the date of such meeting, nor more than 60 days prior to any other action
to which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before 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 meeting (to the extent
permitted by the Certificate of Incorporation and these By-laws) when no prior
action by the Board of Directors is necessary, shall be the day on which the
first written consent is expressed. The record date for determining stockholders
for any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
ARTICLE 5 - General Provisions
------------------------------
5.1 Fiscal Year. The fiscal year of the Corporation shall be fixed by
-----------
resolution of the Board of Directors.
5.2 Corporate Seal. The corporate seal shall be in such form as shall be
--------------
approved by the Board of Directors.
5.3 Notices. Except as otherwise specifically provided herein or required
-------
by law or the Certificate of Incorporation, all notices required to be given to
any stockholder, director, officer, employee or agent of the Corporation shall
be in writing and may in every instance be effectively given by hand delivery to
the recipient thereof, by depositing such notice in the mails, postage paid, or
by sending such notice by prepaid telegram or facsimile transmission. Any such
notice shall be addressed to such stockholder, director, officer, employee or
agent at his or her last known address as the same appears on the books of the
Corporation. The time when such notice is received shall be deemed to be the
time of the giving of the notice.
<PAGE>
-14-
5.4 Waiver of Notice. Whenever any notice whatsoever is required to be
----------------
given by law, by the Certificate of Incorporation or by these By-Laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, facsimile transmission
or any other available method, whether before, at or after the time stated in
such waiver, or the appearance of such person or persons at such meeting in
person or by proxy, shall be deemed equivalent to such notice.
5.5 Evidence of Authority. A certificate by the Secretary, or an
---------------------
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
Corporation shall, as to all persons who rely on the certificate in good faith,
be conclusive evidence of such action.
5.6 Facsimile Signatures. In addition to the provisions for use of
--------------------
facsimile signatures elsewhere specifically authorized in these By-Laws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
5.7 Reliance upon Books, Reports and Records. Each director, each member
----------------------------------------
of any committee designated by the Board of Directors, and each officer of the
Corporation shall, in the performance of his or her duties, be fully protected
in relying in good faith upon the books of account or other records of the
Corporation and upon such information, opinions, reports or statements presented
to the Corporation by any of its officers or employees or committees of the
Board of Directors so designated, or by any other person as to matters which
such director or committee member reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
5.8 Time Periods. In applying any provision of these By-Laws that
------------
requires that an act be done or not be done a specified number of days prior to
an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded, and the day of the event shall be included.
5.9 Certificate of Incorporation. All references in these By-Laws to the
----------------------------
Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the Corporation, as amended and in effect from time to time.
5.10 Transactions with Interested Parties. No contract or transaction
------------------------------------
between the Corporation and one or more of the directors or officers, or between
the Corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because such director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his, her or their votes are counted for such purpose, if:
(1) The material facts as to his or her 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
<PAGE>
-15-
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;
(2) The material facts as to his or her relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified, by the Board of Directors, a
committee of the Board of Directors, 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 which
authorizes the contract or transaction.
5.11 Severability. Any determination that any provision of these By-Laws
------------
is for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-Laws.
5.12 Pronouns. All pronouns used in these By-Laws shall be deemed to refer
--------
to the masculine, feminine or neuter, singular or plural, as the identity of the
persons or persons so designated may require.
ARTICLE 6 - Amendments
----------------------
6.1 By the Board of Directors. Except as is otherwise set forth in these
-------------------------
By-Laws, these By-Laws may be altered, amended or repealed, or new by-laws may
be adopted, by the affirmative vote of a majority of the directors present at
any regular or special meeting of the Board of Directors at which a quorum is
present.
6.2 By the Stockholders. Except as otherwise set forth in these By-Laws,
-------------------
these By-Laws may be altered, amended or repealed or new by-laws may be adopted
by the affirmative vote of the holders of seventy-five percent (75%) of the
shares of the capital stock of the Corporation issued and outstanding and
entitled to vote at any regular meeting of stockholders, or at any special
meeting of stockholders, provided notice of such alteration, amendment, repeal
or adoption of new by-laws shall have been stated in the notice of such special
meeting.
ARTICLE 7 - Indemnification
---------------------------
7.1 Actions Other Than by or in the Right of the Corporation. The
--------------------------------------------------------
Corporation shall indemnify and hold harmless, to the fullest extent permitted
by applicable law as it presently exists or may hereafter be amended, any person
who was or is a party or is threatened to be made a party or is otherwise
involved in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation) by reason of the fact that such person,
or a person for whom such person is the legal representative, is or
<PAGE>
-16-
was a director, trustee, partner, 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 or non-profit entity, against all liability, losses, expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interest of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that such person did not act in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interest of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his or her conduct was unlawful.
7.2 Actions by or in the Right of the Corporation. The Corporation shall
---------------------------------------------
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he or
she is or was a director, trustee, partner, 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 or non-profit entity against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Corporation; except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Corporation unless and only to
the extent that the Court of Chancery of the State of Delaware or the court in
which such action or suit was brought shall determine upon application that
despite the adjudication of liability but in view of all the circumstances of
the case, such person fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery of the State of Delaware or such other
court shall deem proper.
7.3 Success on the Merits. To the extent that any person referred to in
---------------------
Sections 7.1 or 7.2 has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to therein, or in defense of any claim,
issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith.
7.4. Authorization. Any indemnification under Sections 7.1, 7.2 or 7.3
-------------
(unless ordered by a court) shall be made by the Corporation only as authorized
in the specific case upon a determination that indemnification of the director,
trustee, partner, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in Sections 7.1
and 7.2. Such determination shall be made: (a) by the Board of Directors, by a
majority vote of directors who are not parties to such action, suit or
proceeding (whether or not a quorum), or (b) if there are no disinterested
directors or if a majority of disinterested directors so directs, by independent
legal counsel (who may be regular legal counsel to the corporation) in a written
opinion, or (c) by the stockholders.
<PAGE>
-17-
7.5 Expense Advance. Expenses (including attorneys' fees) incurred by an
---------------
officer or director of the Corporation in defending any pending or threatened
civil, criminal, administrative or investigative action, suit or proceeding may
be paid by the Corporation in advance of the final disposition of such action,
suit or proceeding as authorized by the Board of Directors in the manner
provided in Section 7.4 of this Article upon receipt of an undertaking by or on
behalf of such officer or director to repay such amount, if it shall ultimately
be determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article. Such expenses (including attorneys' fees) incurred
by other employees or agents of the Corporation may be so paid upon such terms
and conditions, if any, as the Board of Directors deems appropriate.
7.6 Nonexclusivity. The indemnification and advancement of expenses
--------------
provided by, or granted pursuant to, the other Sections of this Article shall
not be deemed exclusive of any other rights to which any person seeking
indemnification or advancement of expenses may be entitled under any statute,
by-law, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his or her official capacity and as to action in another
capacity while holding such office, and shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
7.7 Insurance. The Corporation shall have power 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, trustee, partner, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise or non-profit
entity against any liability asserted against and incurred by such person in any
such capacity, or arising out of his or her status as such, whether or not the
Corporation would have the power to indemnify such person against such liability
under the provisions of this Article or Section 145 of the Delaware General
Corporation Law.
7.8 "The Corporation". For the purposes of this Article, references to
-----------------
"the Corporation" shall include the resulting corporation and, to the extent
that the Board of Directors of the resulting corporation so decides, all
constituent corporations (including any constituent of a constituent) absorbed
in a consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers and
employees or agents so that any person who is or was a director, officer,
employee or agent of such a constituent corporation or is or was serving at the
request of such constituent corporation as director, trustee, partner, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise or non-profit entity shall stand in the same position under the
provisions of this Article with respect to the resulting or surviving
corporation as he or she would have with respect to such constituent corporation
if its separate existence had continued.
7.9 Other Indemnification. The Corporation's obligation, if any, to
---------------------
indemnify any person who was or is serving at its request as a director,
trustee, partner, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise or non-profit entity shall
be reduced by any amount such person may collect as indemnification from such
other corporation, partnership, joint venture, trust or other enterprise or non-
profit entity or from insurance.
<PAGE>
-18-
7.10 Other Definitions. For purposes of this Article, references to
-----------------
"other enterprises" shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, trustee, officer, employee or agent of
the Corporation which imposes duties on, or involves services by, such director,
trustee, officer, employee, or agent with respect to an employee benefit plan,
its participants, or beneficiaries; and a person who acted in good faith and in
a manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article.
7.11 Continuation of Indemnification. The indemnification and advancement
-------------------------------
of expenses provided by, or granted pursuant to, this Article shall, unless
otherwise provided when authorized or ratified, continue as a person who has
ceased to be a director, trustee, partner, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
<PAGE>
EXHIBIT 4.1
[MOTHERNATURE.COM, INC. LOGO]
NUMBER SHARES
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 61978K 10 5
THIS IS TO CERTIFY THAT
IS THE OWNER OF
FULLY-PAID AND NON-ASESSABLE SHARES OF THE COMMON STOCK. PAR VALUE OF ONE
CENT($.01) EACH. OF
MOTHERNATURE.COM, INC.
transferable upon the books of the Corporation in person or by attorney upon
surrender of this certificate duly endorsed or assigned. This certificate and
the shares represented hereby are subject to the laws of The State of Delaware
and the Certificate of Incorporation and By-laws of the Corporation, each as
from time to time amended.
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/ Michael Bayer [CORPORATE SEAL] /s/ Michael Barach
TREASURER PRESIDENT
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
BY:
<PAGE>
MOTHERNATURE.COM, INC.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS A STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES
THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES
AND/OR RIGHTS, SUCH REQUEST MAY BE MADE TO THE CORPORATION OR THE TRANSFER
AGENT.
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 UNIF GIFT MIN ACT-_____ Custodian ________
TEN ENT - as tenants by the entireties (cost) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
Survivorship and not as tenants Act _______________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(PLEASE PRINT OF TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OR ASSIGNEE)
of the common stock represented by the within Certificate, and do 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 __________________
(Signature)___________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME
AS WRITTEN UPON THE FACT OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:______________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17 Ad-15.
<PAGE>
EXHIBIT 5.1
November 1, 1999
MotherNature.com, Inc.
One Concord Farms
490 Virginia Road
Concord, MA 01742
RE: Registration Statement on Form S-1
(File No. 333-85139)
--------------------
Ladies and Gentlemen:
This opinion relates to an aggregate of 4,715,000 shares of common stock,
par value $.01 per share ("Common Stock"), of MotherNature.com, Inc. (the
"Company"), which are the subject matter of a Registration Statement on Form S-1
as filed with the Securities and Exchange Commission (the "Commission") on
August 13, 1999, as amended (the "Registration Statement").
The 4,715,000 shares of Common Stock covered by the Registration Statement
consist of 4,100,000 shares being sold by the Company and 615,000 shares subject
to an over-allotment option granted by the Company to the underwriters (the
"Underwriters") named in the prospectus (the "Prospectus") incorporated by
reference in the Registration Statement.
Based upon such investigation as we have deemed necessary, we are of the
opinion that when the 4,715,000 shares of Common Stock to be sold by the Company
pursuant to the Prospectus have been issued and paid for in accordance with the
terms described in the Prospectus, such shares of Common Stock will have been
validly issued and will be fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm in the Prospectus under
the caption "Legal Matters."
Very truly yours,
/s/ Testa, Hurwitz & Thibeault, LLP
TESTA, HURWITZ & THIBEAULT, LLP
<PAGE>
EXHIBIT 10.2
MOTHERNATURE.COM, INC.
1999 Stock Plan
---------------
1. Purpose and Eligibility
-----------------------
The purpose of this 1999 Stock Plan (the "Plan") of MotherNature.com, Inc.
----
(the "Company") is to provide stock options and other equity interests in the
-------
Company (each an "Award") to employees, officers, consultants and advisors of
-----
the Company and its Subsidiaries, all of whom are eligible to receive Awards
under the Plan. Any person to whom an Award has been granted under the Plan is
called a "Participant." Additional definitions are contained in Section 8.
-----------
2. Administration
--------------
a. Administration by Board of Directors. The Plan will be administered by
------------------------------------
the Board of Directors of the Company (the "Board"). The Board, in its sole
-----
discretion, shall have the authority to grant and amend Awards, to adopt, amend
and repeal rules relating to the Plan and to interpret and correct the
provisions of the Plan and any Award. All decisions by the Board shall be final
and binding on all interested persons. Neither the Company nor any member of the
Board shall be liable for any action or determination relating to the Plan.
b. Appointment of Committees. To the extent permitted by applicable law,
-------------------------
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). All references in the
---------
Plan to the "Board" shall mean such Committee or the Board.
-----
c. Delegation to Executive Officers. To the extent permitted by applicable
--------------------------------
law, the Board may delegate to one or more executive officers of the Company the
power to grant Awards and exercise such other powers under the Plan as the Board
may determine, provided that the Board shall fix the maximum number of Awards to
be granted and the maximum number of shares issuable to any one Participant
pursuant to Awards granted by such executive officers.
3. Stock Available for Awards
--------------------------
a. Number of Shares. Subject to adjustment under Section 3(c), the
----------------
aggregate number of shares of Common Stock, $.01 par value, of the Company (the
"Common Stock") that may be issued pursuant to the Plan is 368,485 shares. If
------------
any Award expires, or is terminated, surrendered or forfeited, in whole or in
part, the unissued Common Stock covered by such Award shall again be available
for the grant of Awards under the Plan.
b. Per-Participant Limit. Subject to adjustment under Section 3(c), no
---------------------
Participant may be granted Awards during any one fiscal year to purchase more
than 184,242 shares of Common Stock.
<PAGE>
-2-
c. Adjustment to Common Stock. In the event of any stock split, stock
--------------------------
dividend, extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, combination, exchange of shares, liquidation, spin-off, split-up,
or other similar change in capitalization or event, (i) the number and class of
securities available for Awards under the Plan and the per-Participant share
limit, (ii) the number and class of securities, vesting schedule and exercise
price per share subject to each outstanding Option, (iii) the repurchase price
per security subject to repurchase, and (iv) the terms of each other outstanding
stock-based Award shall be adjusted by the Company (or substituted Awards may be
made) to the extent the Board shall determine, in good faith, that such an
adjustment (or substitution) is appropriate.
4. Stock Options
-------------
a. General. The Board may grant options to purchase Common Stock (each,
-------
an "Option" and determine the number of shares of Common Stock to be covered by
------
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option and the Common Stock
issued upon the exercise of each Option, including vesting provisions,
repurchase provisions and restrictions relating to applicable federal or state
securities laws, as it considers advisable.
b. Incentive Stock Options. An Option that the Board intends to be an
-----------------------
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
---------
Stock Option") shall be granted only to employees of the Company and shall be
- ------------
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Board and the Company shall have no liability if an Option
or any part thereof that is intended to be an Incentive Stock Option does not
qualify as such. An Option or any part thereof that does not qualify as an
Incentive Stock Option is referred to herein as a "Nonstatutory Stock Option".
-------------------------
c. Exercise Price. The Board shall establish the exercise price (or
--------------
determine the method by which the exercise price shall be determined) at the
time each Option is granted and specify it in the applicable option agreement.
d. Duration of Options. Each Option shall be exercisable at such times
-------------------
and subject to such terms and conditions as the Board may specify in the
applicable option agreement.
e. Exercise of Option. Options may be exercised only by delivery to the
------------------
Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 4(f) for the number of shares for
which the Option is exercised.
f. Payment Upon Exercise. Common Stock purchased upon the exercise of an
---------------------
Option shall be paid for by one or any combination of the following forms of
payment:
(i) by check payable to the order of the Company;
<PAGE>
-3-
(ii) except as otherwise explicitly provided in the applicable
option agreement, and only if the Common Stock is then publicly traded, delivery
of an irrevocable and unconditional undertaking by a creditworthy broker to
deliver promptly to the Company sufficient funds to pay the exercise price, or
delivery by the Participant to the Company of a copy of irrevocable and
unconditional instructions to a creditworthy broker to deliver promptly to the
Company cash or a check sufficient to pay the exercise price; or
(iii) to the extent explicitly provided in the applicable option
agreement, by (x) delivery of shares of Common Stock owned by the Participant
valued at fair market value (as determined by the Board or as determined
pursuant to the applicable option agreement), (y) delivery of a promissory note
of the Participant to the Company (and delivery to the Company by the
Participant of a check in an amount equal to the par value of the shares
purchased), or (z) payment of such other lawful consideration as the Board may
determine.
5. Restricted Stock
----------------
a. Grants. The Board may grant Awards entitling recipients to acquire
------
shares of Common Stock, subject to (i) delivery to the Company by the
Participant of a check in an amount at least equal to the par value of the
shares purchased, and (ii) the right of the Company to repurchase all or part of
such shares at their issue price or other stated or formula price from the
Participant in the event that conditions specified by the Board in the
applicable Award are not satisfied prior to the end of the applicable
restriction period or periods established by the Board for such Award (each, a
"Restricted Stock Award").
-----------------------
b. Terms and Conditions. The Board shall determine the terms and
--------------------
conditions of any such Restricted Stock Award. Any stock certificates issued in
respect of a Restricted Stock Award shall be registered in the name of the
Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). After the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or, if the Participant has died, to the
beneficiary designated by a Participant, in a manner determined by the Board, to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
----------------------
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
6. Other Stock-Based Awards
------------------------
The Board shall have the right to grant other Awards based upon the Common
Stock having such terms and conditions as the Board may determine, including,
without limitation, the grant of shares based upon certain conditions, the grant
of securities convertible into Common Stock and the grant of stock appreciation
rights, phantom stock awards or stock units.
7. General Provisions Applicable to Awards
---------------------------------------
<PAGE>
-4-
a. Transferability of Awards. Except as the Board may otherwise determine
-------------------------
or provide in an Award, Awards shall not be sold, assigned, transferred, pledged
or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be exercisable only
by the Participant. References to a Participant, to the extent relevant in the
context, shall include references to authorized transferees.
b. Documentation. Each Award under the Plan shall be evidenced by a
-------------
written instrument in such form as the Board shall determine or as executed by
an officer of the Company pursuant to authority delegated by the Board. Each
Award may contain terms and conditions in addition to those set forth in the
Plan provided that such terms and conditions do not contravene the provisions of
the Plan.
c. Board Discretion. The terms of each type of Award need not be
----------------
identical, and the Board need not treat Participants uniformly.
d. Termination of Status. The Board shall determine the effect on an Award
---------------------
of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, or the Participant's legal
representative, conservator, guardian or Designated Beneficiary, may exercise
rights under the Award.
e. Acquisition of the Company
--------------------------
(i) Consequences of an Acquisition. Unless otherwise expressly provided
------------------------------
in the applicable Option or Award, upon the occurrence of an Acquisition, the
Board or the board of directors of the surviving or acquiring entity (as used in
this Section 7(e)(i), also the "Board") shall, as to outstanding Awards (on the
-----
same basis or on different bases, as the Board shall specify), make appropriate
provision for the continuation of such Awards by the Company or the assumption
of such Awards by the surviving or acquiring entity and by substituting on an
equitable basis for the shares then subject to such Awards either (a) the
consideration payable with respect to the outstanding shares of Common Stock in
connection with the Acquisition, (b) shares of stock of the surviving or
acquiring corporation or (c) such other securities as the Board deems
appropriate, the fair market value of which (as determined by the Board in its
sole discretion) shall not materially differ from the fair market value of the
shares of Common Stock subject to such Awards immediately preceding the
Acquisition. In addition to or in lieu of the foregoing, with respect to
outstanding Options, the Board may, upon written notice to the affected
optionees, provide that one or more Options must be exercised, to the extent
then exercisable or to be exercisable as a result of the Acquisition, within a
specified number of days of the date of such notice, at the end of which period
such Options shall terminate; or terminate one or more Options in exchange for a
cash payment equal to the excess of the fair market value (as determined by the
Board in its sole discretion) of the shares subject to such Options (to the
extent then exercisable or to be exercisable as a result of the Acquisition)
over the exercise price thereof.
<PAGE>
-5-
(ii) Acquisition Defined. An "Acquisition" shall mean: (x) any merger
-------------------
or consolidation after which the voting securities of the Company outstanding
immediately prior thereto represent (either by remaining outstanding or by being
converted into voting securities of the surviving or acquiring entity) less than
50% of the combined voting power of the voting securities of the Company or such
surviving or acquiring entity outstanding immediately after such event; or (y)
any sale of all or substantially all of the assets or capital stock of the
Company (other than in a spin-off or similar transaction) or (z) any other
acquisition of the business of the Company, as determined by the Board.
(iii) Assumption of Options Upon Certain Events. In connection with a
-----------------------------------------
merger or consolidation of an entity with the Company or the acquisition by the
Company of property or stock of an entity, the Board may grant Awards under the
Plan in substitution for stock and stock-based awards issued by such entity or
an affiliate thereof. The substitute Awards shall be granted on such terms and
conditions as the Board considers appropriate in the circumstances.
(iv) Pooling-of Interests-Accounting. If the Company proposes to
-------------------------------
engage in an Acquisition intended to be accounted for as a pooling-of-interests,
and in the event that the provisions of this Plan or of any Award hereunder, or
any actions of the Board taken in connection with such Acquisition, are
determined by the Company's or the acquiring company's independent public
accountants to cause such Acquisition to fail to be accounted for as a
pooling-of-interests, then such provisions or actions shall be amended or
rescinded by the Board, without the consent of any Participant, to be consistent
with pooling-of-interests accounting treatment for such Acquisition.
(v) Parachute Awards. If, in connection with an Acquisition, a tax
----------------
under Section 4999 of the Code would be imposed on the Participant (after taking
into account the exceptions set forth in Sections 280G(b)(4) and 280G(b)(5) of
the Code), then the number of Awards which shall become exercisable, realizable
or vested as provided in such section shall be reduced (or delayed), to the
minimum extent necessary, so that no such tax would be imposed on the
Participant (the Awards not becoming so accelerated, realizable or vested, the
"Parachute Awards"); provided, however, that if the "aggregate present value" of
---------------- -----------------------
the Parachute Awards would exceed the tax that, but for this sentence, would be
imposed on the Participant under Section 4999 of the Code in connection with the
Acquisition, then the Awards shall become immediately exercisable, realizable
and vested without regard to the provisions of this sentence. For purposes of
the preceding sentence, the "aggregate present value" of an Award shall be
-----------------------
calculated on an after-tax basis (other than taxes imposed by Section 4999 of
the Code) and shall be based on economic principles rather than the principles
set forth under Section 280G of the Code and the regulations promulgated
thereunder. All determinations required to be made under this Section 7(e)(v)
shall be made by the Company.
f. Withholding. Each Participant shall pay to the Company, or make
-----------
provisions satisfactory to the Company for payment of, any taxes required by law
to be withheld in connection with Awards to such Participant no later than the
date of the event creating the tax liability. The Board may allow Participants
to satisfy such tax obligations in whole or in part by
<PAGE>
-6-
transferring shares of Common Stock, including shares retained from the Award
creating the tax obligation, valued at their fair market value (as determined by
the Board or as determined pursuant to the applicable option agreement). The
Company may, to the extent permitted by law, deduct any such tax obligations
from any payment of any kind otherwise due to a Participant.
g. Amendment of Awards. The Board may amend, modify or terminate any
-------------------
outstanding Award including, but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that, except as otherwise provided in Section 7(e)(iv), the
Participant's consent to such action shall be required unless the Board
determines that the action, taking into account any related action, would not
materially and adversely affect the Participant.
h. Conditions on Delivery of Stock. The Company will not be obligated to
-------------------------------
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
i. Acceleration. The Board may at any time provide that any Options shall
------------
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of some or all restrictions, or that any other stock-based
Awards may become exercisable in full or in part or free of some or all
restrictions or conditions, or otherwise realizable in full or in part, as the
case may be, despite the fact that the foregoing actions may (i) cause the
application of Sections 280G and 4999 of the Code if a change in control of the
Company occurs, or (ii) disqualify all or part of the Option as an Incentive
Stock Option.
8. Miscellaneous
-------------
a. Definitions.
-----------
(i) "Company" for purposes of eligibility under the Plan, shall
-------
include any present or future subsidiary corporations of MotherNature.com, Inc.,
as defined in Section 424(f) of the Code (a "Subsidiary"), and any present or
----------
future parent corporation of MotherNature.com, Inc., as defined in Section
424(e) of the Code. For purposes of Awards other than Incentive Stock Options,
the term "Company" shall include any other business venture in which the Company
-------
has a direct or indirect significant interest, as determined by the Board in its
sole discretion.
(ii) "Code" means the Internal Revenue Code of 1986, as amended, and
----
any regulations promulgated thereunder.
<PAGE>
-7-
(iii) "Employee" for purposes of eligibility under the Plan shall
--------
include a person to whom an offer of employment has been extended by the
Company.
b. No Right To Employment or Other Status. No person shall have any claim
--------------------------------------
or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan.
c. No Rights As Stockholder. Subject to the provisions of the applicable
------------------------
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder thereof.
d. Effective Date and Term of Plan. The Plan shall become effective upon
-------------------------------
adoption by the Board. No Awards shall be granted under the Plan after the
completion of ten years from the date on which the Plan was adopted by the
Board, but Awards previously granted may extend beyond that date.
e. Amendment of Plan. The Board may amend, suspend or terminate the Plan
-----------------
or any portion thereof at any time.
f. Governing Law. The provisions of the Plan and all Awards made
-------------
hereunder shall be governed by and interpreted in accordance with the laws of
Delaware, without regard to any applicable conflicts of law.
Adopted by the Board of Directors on July 22, 1999.
Approved by the stockholders on October 29, 1999.
<PAGE>
EXHIBIT 10.3
MOTHERNATURE.COM, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
Article 1 - Purpose.
- -------------------
This 1999 Employee Stock Purchase Plan (the "Plan") is intended to
encourage stock ownership by all eligible employees of MotherNature.com (the
"Company"), a Delaware corporation, and its participating subsidiaries (as
defined in Article 17) so that they may share in the growth of the Company by
acquiring or increasing their proprietary interest in the Company. The Plan is
designed to encourage eligible employees to remain in the employ of the Company
and its participating subsidiaries. The Plan is intended to constitute an
"employee stock purchase plan" within the meaning of Section 423(b) of the
Internal Revenue Code of 1986, as amended (the "Code").
Article 2 - Administration of the Plan.
- --------------------------------------
The Plan may be administered by a committee appointed by the Board of
Directors of the Company (the "Committee"). The Committee shall consist of not
less than two members of the Company's Board of Directors. The Board of
Directors may from time to time remove members from, or add members to, the
Committee. Vacancies on the Committee, howsoever caused, shall be filled by the
Board of Directors. The Committee may select one of its members as Chairman, and
shall hold meetings at such times and places as it may determine. Acts by a
majority of the Committee, or acts reduced to or approved in writing by a
majority of the members of the Committee, shall be the valid acts of the
Committee.
The interpretation and construction by the Committee of any provisions of
the Plan or of any option granted under it shall be final, unless otherwise
determined by the Board of Directors. The Committee may from time to time adopt
such rules and regulations for carrying out the Plan as it may deem best,
provided that any such rules and regulations shall be applied on a uniform basis
to all employees under the Plan. No member of the Board of Directors or the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any option granted under it.
In the event the Board of Directors fails to appoint or refrains from
appointing a Committee, the Board of Directors shall have all power and
authority to administer the Plan. In such event, the word "Committee" wherever
used herein shall be deemed to mean the Board of Directors.
Article 3 - Eligible Employees.
- ------------------------------
All employees of the Company or any of its participating subsidiaries whose
customary employment is more than 20 hours per week and for more than five
months in any calendar year and who have completed 90 days of employment on or
before the first day of a Payment Period (as hereinafter defined) shall be
eligible to receive options under the Plan to purchase common stock of the
Company, and all eligible employees shall have the same rights and privileges
hereunder. Persons who are eligible employees on the first business day of any
Payment Period (as defined in Article 5) shall receive their options as of such
day. Persons who become eligible employees after any date on which
<PAGE>
-2-
options are granted under the Plan shall be granted options on the first day of
the next succeeding Payment Period on which options are granted to eligible
employees under the Plan. In no event, however, may an employee be granted an
option if such employee, immediately after the option was granted, would be
treated as owning 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 parent
corporation or subsidiary corporation, as the terms "parent corporation" and
"subsidiary corporation" are defined in Section 424(e) and (f) of the Code. For
purposes of determining stock ownership under this paragraph, the rules of
Section 424(d) of the Code shall apply, and stock which the employee may
purchase under outstanding options shall be treated as stock owned by the
employee.
Article 4 - Stock Subject to the Plan.
- -------------------------------------
The stock subject to the options under the Plan shall be shares of the
Company's authorized but unissued common stock, par value $.01 per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company, including
shares purchased in the open market. The aggregate number of shares which may be
issued pursuant to the Plan is 100,496, subject to adjustment as provided in
Article 12. If any option granted under the Plan shall expire or terminate for
any reason without having been exercised in full or shall cease for any reason
to be exercisable in whole or in part, the unpurchased shares subject thereto
shall again be available under the Plan.
Article 5 - Payment Period and Stock Options.
- --------------------------------------------
The first Payment Period during which payroll deductions will be
accumulated under the Plan shall commence on the first day of the first calendar
month following effectiveness of the Form S-8 registration statement filed with
the Securities and Exchange Commission covering the shares to be issued pursuant
to the Plan and shall end on the next succeeding June 30 or December 31. For the
remainder of the duration of the Plan, Payment Periods shall consist of the
six-month periods commencing on January 1 and July 1 and ending on June 30 and
December 31, respectively, of each calendar year.
Twice each year, on the first business day of each Payment Period, the
Company will grant to each eligible employee who is then a participant in the
Plan an option to purchase on the last day of such Payment Period, at the Option
Price hereinafter provided for, a maximum of 50 shares, on condition that such
employee remains eligible to participate in the Plan throughout the remainder of
such Payment Period. The participant shall be entitled to exercise the option so
granted only to the extent of the participant's accumulated payroll deductions
on the last day of such Payment Period. If the participant's accumulated payroll
deductions on the last day of the Payment Period would enable the participant to
purchase more than 50 shares except for the 50-share limitation, the excess of
the amount of the accumulated payroll deductions over the aggregate purchase
price of the 50 shares shall be promptly refunded to the participant by the
Company, without interest. The Option Price per share for each Payment Period
shall be the lesser of (i) 85% of the average market price of the Common Stock
on the first business day of the Payment Period and (ii) 85% of the average
market price of the Common Stock on the last business day of the Payment Period,
in either event rounded up to the nearest cent. The foregoing limitation on the
number of shares subject to option and the Option Price shall be subject to
adjustment as provided in Article 12.
For purposes of the Plan, the term "average market price" on any date means
(i) the average (on that date) of the high and low prices of the 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
<PAGE>
-3-
exchange; or (ii) the last reported sale price (on that date) of the Common
Stock on the NASDAQ 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 last quoted (on that date) by an established quotation service for over-
the-counter securities, if the Common Stock is not reported on the NASDAQ
National Market; or (iv) if the Common Stock is not publicly traded, the fair
market value of the Common Stock as determined by the Committee after taking
into consideration all factors which it deems appropriate, including, without
limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length.
For purposes of the Plan, the term "business day" means a day on which
there is trading on the NASDAQ National Market or the aforementioned national
securities exchange, whichever is applicable pursuant to the preceding
paragraph; and if neither is applicable, a day that is not a Saturday, Sunday or
legal holiday in Massachusetts.
No employee shall be granted an option which permits the employee's right
to purchase stock under the Plan, and under all other Section 423(b) employee
stock purchase plans of the Company and any parent or subsidiary corporations,
to accrue at a rate which exceeds $25,000 of fair market value of such stock
(determined on the date or dates that options on such stock were granted) for
each calendar year in which such option is outstanding at any time. The purpose
of the limitation in the preceding sentence is to comply with Section 423(b)(8)
of the Code. If the participant's accumulated payroll deductions on the last day
of the Payment Period would otherwise enable the participant to purchase Common
Stock in excess of the Section 423(b)(8) limitation described in this paragraph,
the excess of the amount of the accumulated payroll deductions over the
aggregate purchase price of the shares actually purchased shall be promptly
refunded to the participant by the Company, without interest.
Article 6 - Exercise of Option.
- ------------------------------
Each eligible employee who continues to be a participant in the Plan on the
last day of a Payment Period shall be deemed to have exercised his or her option
on such date and shall be deemed to have purchased from the Company such number
of full shares of Common Stock reserved for the purpose of the Plan as the
participant's accumulated payroll deductions on such date will pay for at the
Option Price, subject to the 50-share limit of the option and the Section
423(b)(8) limitation described in Article 5. If the individual is not a
participant on the last day of a Payment Period, then he or she shall not be
entitled to exercise his or her option. Only full shares of Common Stock may be
purchased under the Plan. Unused payroll deductions remaining in a participant's
account at the end of a Payment Period by reason of the inability to purchase a
fractional share shall be carried forward to the next Payment Period.
Article 7 - Authorization for Entering the Plan.
- -----------------------------------------------
An employee may elect to enter the Plan by filling out, signing and
delivering to the Company an authorization:
A. Stating the percentage to be deducted regularly from the employee's
pay;
B. Authorizing the purchase of stock for the employee in each Payment
Period in accordance with the terms of the Plan; and
<PAGE>
-4-
C. Specifying the exact name or names in which stock purchased for the
employee is to be issued as provided under Article 11 hereof.
Such authorization must be received by the Company at least ten days before the
first day of the next succeeding Payment Period and shall take effect only if
the employee is an eligible employee on the first business day of such Payment
Period.
Unless a participant files a new authorization or withdraws from the Plan,
the deductions and purchases under the authorization the participant has on file
under the Plan will continue from one Payment Period to succeeding Payment
Periods as long as the Plan remains in effect.
The Company will accumulate and hold for each participant's account the
amounts deducted from his or her pay. No interest will be paid on these amounts.
Article 8 - Maximum Amount of Payroll Deductions.
- ------------------------------------------------
An employee may authorize payroll deductions in an amount (expressed as a
whole percentage) not less than one percent (1%) but not more than ten percent
(10%) of the employee's total compensation, including base pay or salary and any
overtime, bonuses or commissions.
Article 9 - Change in Payroll Deductions.
- ----------------------------------------
Deductions may not be increased or decreased during a Payment Period.
However, a participant may withdraw in full from the Plan.
Article 10 - Withdrawal from the Plan.
- -------------------------------------
A participant may withdraw from the Plan (in whole but not in part) at any
time prior to the last day of a Payment Period by delivering a withdrawal notice
to the Company.
To re-enter the Plan, an employee who has previously withdrawn must file a
new authorization at least ten days before the first day of the next Payment
Period in which he or she wishes to participate. The employee's re-entry into
the Plan becomes effective at the beginning of such Payment Period, provided
that he or she is an eligible employee on the first business day of the Payment
Period.
Article 11 - Issuance of Stock.
- ------------------------------
Certificates for stock issued to participants shall be delivered as soon as
practicable after each Payment Period by the Company's transfer agent.
Stock purchased under the Plan shall be issued only in the name of the
participant, or if the participant's authorization so specifies, in the name of
the participant and another person of legal age as joint tenants with rights of
survivorship.
Article 12 - Adjustments.
- ------------------------
Upon the happening of any of the following described events, a
participant's rights under options granted under the Plan shall be adjusted as
hereinafter provided:
<PAGE>
-5-
A. In the event that the shares of Common Stock shall be subdivided or
combined into a greater or smaller number of shares or if, upon a
reorganization, split-up, liquidation, recapitalization or the like of the
Company, the shares of Common Stock shall be exchanged for other securities
of the Company, each participant shall be entitled, subject to the
conditions herein stated, to purchase such number of shares of Common Stock
or amount of other securities of the Company as were exchangeable for the
number of shares of Common Stock that such participant would have been
entitled to purchase except for such action, and appropriate adjustments
shall be made in the purchase price per share to reflect such subdivision,
combination or exchange; and
B. In the event the Company shall issue any of its shares as a stock
dividend upon or with respect to the shares of stock of the class which
shall at the time be subject to option hereunder, each participant upon
exercising such an option shall be entitled to receive (for the purchase
price paid upon such exercise) the shares as to which the participant is
exercising his or her option and, in addition thereto (at no additional
cost), such number of shares of the class or classes in which such stock
dividend or dividends were declared or paid, and such amount of cash in
lieu of fractional shares, as is equal to the number of shares thereof and
the amount of cash in lieu of fractional shares, respectively, which the
participant would have received if the participant had been the holder of
the shares as to which the participant is exercising his or her option at
all times between the date of the granting of such option and the date of
its exercise.
Upon the happening of any of the foregoing events, the class and aggregate
number of shares set forth in Article 4 hereof which are subject to options
which have been or may be granted under the Plan and the limitations set forth
in the second paragraph of Article 5 shall also be appropriately adjusted to
reflect the events specified in paragraphs A and B above. Notwithstanding the
foregoing, any adjustments made pursuant to paragraphs A or B shall be made only
after the Committee, based on advice of counsel for the Company, determines
whether such adjustments would constitute a "modification" (as that term is
defined in Section 424 of the Code). If the Committee determines that such
adjustments would constitute a modification, it may refrain from making such
adjustments.
If the Company is to be consolidated with or acquired by another entity in
a merger, a sale of all or substantially all of the Company's assets or
otherwise (an "Acquisition"), the Committee or the board of directors of any
entity assuming the obligations of the Company hereunder (the "Successor Board")
shall, with respect to options then outstanding under the Plan, either (i) make
appropriate provision for the continuation of such options by arranging for the
substitution on an equitable basis for the shares then subject to such options
either (a) the consideration payable with respect to the outstanding shares of
the Common Stock in connection with the Acquisition, (b) shares of stock of the
successor corporation, or a parent or subsidiary of such corporation, or (c)
such other securities as the Successor Board deems appropriate, the fair market
value of which shall not materially exceed the fair market value of the shares
of Common Stock subject to such options immediately preceding the Acquisition;
or (ii) terminate each participant's options in exchange for a cash payment
equal to the excess of (a) the fair market value on the date of the Acquisition,
of the number of shares of Common Stock that the participant's accumulated
payroll deductions as of the date of the Acquisition could purchase, at an
option price determined with reference only to the first business day of the
applicable Payment Period and subject to the 50-share, Code Section 423(b)(8)
and fractional-share limitations on the amount of stock a participant would be
entitled to purchase, over (b) the result of multiplying such number of shares
by such option price.
The Committee or Successor Board shall determine the adjustments to be made
under this Article 12, and its determination shall be conclusive.
<PAGE>
-6-
Article 13 - No Transfer or Assignment of Employee's Rights.
- -----------------------------------------------------------
An option granted under the Plan may not be transferred or assigned and may
be exercised only by the participant.
Article 14 - Termination of Employee's Rights.
- ---------------------------------------------
Whenever a participant ceases to be an eligible employee because of
retirement, voluntary or involuntary termination, resignation, layoff,
discharge, death or for any other reason, his or her rights under the Plan shall
immediately terminate, and the Company shall promptly refund, without interest,
the entire balance of his or her payroll deduction account under the Plan.
Notwithstanding the foregoing, eligible employment shall be treated as
continuing intact while a participant is on military leave, sick leave or other
bona fide leave of absence, for up to 90 days, or for so long as the
participant's right to re-employment is guaranteed either by statute or by
contract, if longer than 90 days.
Article 15 - Termination and Amendments to Plan.
- -----------------------------------------------
Unless terminated sooner as provided below, the Plan shall terminate on
December 31, 2009. The Plan may be terminated at any time by the Company's Board
of Directors but such termination shall not affect options then outstanding
under the Plan. It will terminate in any case when all or substantially all of
the unissued shares of stock reserved for the purposes of the Plan have been
purchased. If at any time shares of stock reserved for the purpose of the Plan
remain available for purchase but not in sufficient number to satisfy all then
unfilled purchase requirements, the available shares shall be apportioned among
participants in proportion to the amount of payroll deductions accumulated on
behalf of each participant that would otherwise be used to purchase stock, and
the Plan shall terminate. Upon such termination or any other termination of the
Plan, all payroll deductions not used to purchase stock will be refunded,
without interest.
The Committee or the Board of Directors may from time to time adopt
amendments to the Plan provided that, without the approval of the stockholders
of the Company, no amendment may (i) increase the number of shares that may be
issued under the Plan; (ii) change the class of employees eligible to receive
options under the Plan, if such action would be treated as the adoption of a new
plan for purposes of Section 423(b) of the Code; or (iii) cause Rule 16b-3 under
the Securities Exchange Act of 1934 to become inapplicable to the Plan.
Article 16 - Limits on Sale of Stock Purchased under the Plan.
- -------------------------------------------------------------
The Plan is intended to provide shares of Common Stock for investment and
not for resale. The Company does not, however, intend to restrict or influence
any employee in the conduct of his or her own affairs. An employee may,
therefore, sell stock purchased under the Plan at any time the employee chooses,
subject to compliance with any applicable federal or state securities laws and
subject to any restrictions imposed under Article 21 to ensure that tax
withholding obligations are satisfied. THE EMPLOYEE ASSUMES THE RISK OF ANY
MARKET FLUCTUATIONS IN THE PRICE OF THE STOCK.
<PAGE>
-7-
Article 17 - Participating Subsidiaries.
- ---------------------------------------
The term "participating subsidiary" shall mean any present or future
subsidiary of the Company, as that term is defined in Section 424(f) of the
Code, which is designated from time to time by the Board of Directors to
participate in the Plan. The Board of Directors shall have the power to make
such designation before or after the Plan is approved by the stockholders.
Article 18 - Optionees Not Stockholders.
- ---------------------------------------
Neither the granting of an option to an employee nor the deductions from
his or her pay shall constitute such employee a stockholder of the shares
covered by an option until such shares have been actually purchased by the
employee.
Article 19 - Application of Funds.
- ---------------------------------
The proceeds received by the Company from the sale of Common Stock pursuant
to options granted under the Plan will be used for general corporate purposes.
Article 20 - Notice to Company of Disqualifying Disposition.
- -----------------------------------------------------------
By electing to participate in the Plan, each participant agrees to notify
the Company in writing immediately after the participant transfers Common Stock
acquired under the Plan, if such transfer occurs within two years after the
first business day of the Payment Period in which such Common Stock was
acquired. Each participant further agrees to provide any information about such
a transfer as may be requested by the Company or any subsidiary corporation in
order to assist it in complying with the tax laws. Such dispositions generally
are treated as "disqualifying dispositions" under Sections 421 and 424 of the
Code, which have certain tax consequences to participants and to the Company and
its participating subsidiaries.
Article 21 - Withholding of Additional Income Taxes.
- ---------------------------------------------------
By electing to participate in the Plan, each participant acknowledges that
the Company and its participating subsidiaries are required to withhold taxes
with respect to the amounts deducted from the participant's compensation and
accumulated for the benefit of the participant under the Plan, and each
participant agrees that the Company and its participating subsidiaries may
deduct additional amounts from the participant's compensation, when amounts are
added to the participant's account, used to purchase Common Stock or refunded,
in order to satisfy such withholding obligations. Each participant further
acknowledges that when Common Stock is purchased under the Plan the Company and
its participating subsidiaries may be required to withhold taxes with respect to
all or a portion of the difference between the fair market value of the Common
Stock purchased and its purchase price, and each participant agrees that such
taxes may be withheld from compensation otherwise payable to such participant.
It is intended that tax withholding will be accomplished in such a manner that
the full amount of payroll deductions elected by the participant under Article 7
will be used to purchase Common Stock. However, if amounts sufficient to satisfy
applicable tax withholding obligations have not been withheld from compensation
otherwise payable to any participant, then, notwithstanding any other provision
of the Plan, the Company may withhold such taxes from the participant's
accumulated payroll deductions and apply the net amount to the purchase of
Common Stock, unless the participant pays to the Company, prior to the exercise
date, an amount sufficient to satisfy such withholding obligations. Each
participant further acknowledges that the Company and its participating
subsidiaries
<PAGE>
-8-
may be required to withhold taxes in connection with the disposition of stock
acquired under the Plan and agrees that the Company or any participating
subsidiary may take whatever action it considers appropriate to satisfy such
withholding requirements, including deducting from compensation otherwise
payable to such participant an amount sufficient to satisfy such withholding
requirements or conditioning any disposition of Common Stock by the participant
upon the payment to the Company or such subsidiary of an amount sufficient to
satisfy such withholding requirements.
Article 22 - Governmental Regulations.
- -------------------------------------
The Company's obligation to sell and deliver shares of Common Stock under
the Plan is subject to the approval of any governmental authority required in
connection with the authorization, issuance or sale of such shares.
Government regulations may impose reporting or other obligations on the
Company with respect to the Plan. For example, the Company may be required to
identify shares of Common Stock issued under the Plan on its stock ownership
records and send tax information statements to employees and former employees
who transfer title to such shares.
Article 23 - Governing Law.
- --------------------------
The validity and construction of the Plan shall be governed by the laws of
the State of Delaware, without giving effect to the principles of conflicts of
law thereof.
Article 24 - Approval of Board of Directors and Stockholders of the Company.
- ---------------------------------------------------------------------------
The Plan was adopted by the Board of Directors on July 22, 1999 and was
approved by the stockholders of the Company on October 29, 1999.
<PAGE>
EXHIBIT 10.4
CONTENT LICENSE AND MARKETING AGREEMENT
----------------------------------------
THIS CONTENT LICENSE AND MARKETING AGREEMENT (the "Agreement") is entered
into as of the 17th day of September, 1999, by and between RODALE INC., a
Pennsylvania corporation with its principal place of business located at 33 East
Minor Street, Emmaus, Pennsylvania 18098-0099 (hereinafter referred to as
"Rodale") and MOTHERNATURE.COM, INC., a Delaware corporation with its principal
place of business located at One Concord Farms, Second Floor, 490 Virginia Road,
Concord, Massachusetts 01742 (hereinafter referred to as "MotherNature").
W I T N E S S E T H:
WHEREAS, Rodale is a publisher of books and magazines containing content,
inter alia, related to herbal supplements, vitamins and minerals; and
WHEREAS, MotherNature is the developer and operator of websites on the
World Wide Web encompassing content, community and e-commerce in the sale of
dietary supplements, herbal products, vitamins and minerals; and
WHEREAS, Rodale and MotherNature desire to enter into an Agreement
establishing a licensing, marketing and equity arrangement; and
NOW THEREFORE, intending to be legally bound hereby, the parties agree as
follows:
1. DEFINITIONS
-----------
The above recitals are incorporated herein by reference as though set forth
fully and are a part of this Agreement.
1
<PAGE>
1.1 "Agreement", "Rodale" and "MotherNature" are defined as set forth in
the introduction and recitals to this Agreement.
1.2 "Books" means the compilation of text, illustrations, photographs,
tables and other editorial elements contained in a publication published by
Rodale in book form, whether printed, electronic, or any other medium now known
or hereafter invented, excluding those elements of the Book(s) identified on
Schedule 6.1 and/or future endorsement to Schedule 6.1.
1.3 "Change of Control" shall mean:
(a) The acquisition of ownership, directly or indirectly, beneficially
or of record by any person or entity controlling fifty (50%) percent or more of
the aggregate ordinary voting power represented by the authorized, issued and
outstanding voting capital stock of MotherNature; or
(b) The obtaining, by contract or otherwise, of the power to elect
one-half ( 1/2) of the members of the Board of Directors; or
(c) The succession to, or acquisition by, a third party, by merger or
otherwise, of all or substantially all of MotherNature's business, stock or
assets.
1.4 "Categories" shall mean the topics of vitamins, minerals, dietary
supplements, medicinal herbs, natural healing, alternative medicine (including
aromatherapy and homeopathy), cooking, and home health remedies, but excludes
pets, gardening and all other topics not listed as Categories.
1.5 "Co-Branded MotherNature Internet Site" shall mean a web site (or any
other internet distributed information service that uses the hypertext transfer
protocol or any successor or
2
<PAGE>
alternative protocol) on the World Wide Web that jointly promotes MotherNature
and a third party and for which the uniform resource locator ("URL") address is
owned, operated or controlled by MotherNature.
1.6 "Content" shall mean:
(a) Books previously published by Rodale and which are available for
sale in the current (Fall 1999) Rodale retail book catalog, the principal
editorial content of which are within one (1) or more of the Categories, and
which are listed on Schedule A attached hereto and incorporated herein by this
reference; and
(b) Those Books hereafter published by Rodale during the term of this
Agreement, the principal editorial content of which are within one (1) or more
of the Categories; such Books shall, pursuant to the terms of this Agreement, be
made a part of Schedule A by periodic endorsements to Schedule A; and
(c) Chapters of Books published by Rodale during the term of this
Agreement, the principal editorial content of which Chapters are within one (1)
or more of the Categories ("Relevant Chapters"), even though the principal
editorial content of the Book as a whole from which the Relevant Chapter(s) come
is not within one (1) of the Categories. Such Relevant Chapters shall, pursuant
to the terms of this Agreement, be made part of Schedule A by periodic
endorsements to Schedule A.
1.7 "Competitor" means any person or entity, or parent, subsidiary or
affiliate of such person or entity, which at the time of execution of this
Agreement or at any time during the term hereof derives forty (40%) percent or
more of its revenues from the sale to consumers of vitamins,
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minerals, supplements, herbs, drugstore products (over the counter and
prescription products which are ingested or topically applied) aromatherapy
products, or homeopathic products. By way of clarification, present competitors
include, without limitation, CVS/Soma.com, SelfCare, Drugstore.com, RiteAid/GNC,
PlanetRx, Healthshop, e-nutrition, All Herbs, vitamins.net, Vitamin Shoppe,
Green Tree, more.com and vitamins.com.
1.8 "Excerpts" means portions of the Content which are less than the
entire text and images of any single Book such as chapters, paragraphs,
sentences, outlines, summaries and synopses of any Book or portion thereof,
which chapters, paragraphs, sentences, outlines, summaries and synopses shall be
extracted from Content or prepared by MotherNature. The term "Content" shall
include Excerpts.
1.9 "Exclusive" means that Rodale shall not grant any license, sublicense
or other right, and shall not authorize or permit any third party to grant any
license, sublicense or other right, to any Competitor for the particular
activity described. All rights to use the Trademark are non-exclusive.
(a) Rodale Usage. All rights not specifically granted to MotherNature
------------
by this Agreement are reserved to Rodale. The rights reserved to Rodale shall,
except as may otherwise be provided herein, include the following:
(i) To promote the sale of its information based products in any
manner using all existing and future technologies and media which it deems
appropriate, without restriction, including on its own internet sites,
other internet sites or otherwise;
4
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(ii) To publish, promote and sell its Content in printed form
including, but not limited to, Books, magazines, specials and compilations,
adaptations and revisions thereof;
(iii) To use selected Content to promote the sales of Books,
magazines, specials, compilations, adaptations, revisions and any other
information based products of Rodale throughout the term of this Agreement;
(iv) To use its products and the content thereof in the print
medium and on Rodale's own sites on the World Wide Web;
(v) To enter into such arrangements with non-Competitors as it
shall deem fit in its sole discretion; and
(vi) To publish, promote, distribute and sell its information
based products, including Content, using all existing and future
technologies and media, including, but not limited to, electronic format
book publishing, such as published by Rocket Books.
1.10 "Internet Site" means any MotherNature owned, operated, or controlled
web site (or any other internet distributed information service that uses the
hypertext transfer protocol or any successor or alternative protocol) on the
World Wide Web. The term "Internet Site", includes any Co-Branded MotherNature
Internet Site.
1.11 "Modifications" means any Content that has been modified by changes
to its format, linking or presentation. By way of clarification and without
limiting the generality of the foregoing, Modifications do not include the
Internet Site or any other content made available on the Internet Site, or any
expert system created by MotherNature or its service providers or independent
5
<PAGE>
contractors, or any other features or functions within the Internet Site,
provided that no Content is included in such features or functions.
1.12 "Relevant Chapter(s)" shall have the meaning ascribed to that term in
Section 1.6(c).
1.13 "Stock Images" means photographs and slide transparencies which are
owned by Rodale without restriction, and which are contained in Rodale's Stock
Images library.
1.14 "Trademark" means the registered trademarks of Rodale.
1.15 "Web Enablement" means conversion of Content to an electronic medium
capable of displaying the Content on a computer monitor via the internet.
2. EFFECTIVE DATE AND TERM
-----------------------
2.1 This Agreement shall become effective upon its execution by all
parties hereto (the "Effective Date"), and shall remain in effect for a period
of ten (10) years from that date, except as otherwise provided for herein.
3. CONTENT AND BOOK SALES RELATIONSHIP
-----------------------------------
3.1 Term. The term of this Content and Book Sale Relationship shall be
----
for ten (10) years.
3.2 Rights. Rodale agrees that MotherNature shall have:
------
(a) The right to Web Enable those Books now listed on Schedule A and
those Books and Relevant Chapters which are hereafter added to Schedule A by
endorsement to Schedule A pursuant to the terms of this Agreement; and
6
<PAGE>
(b) The right to use, reproduce, have reproduced, display and transmit
the Content on the Internet Site and to make Modifications of the Content for
such purposes. Provided, however, that MotherNature will not provide, with
respect to the Internet Site, functionality which enables the user to download
an entire Book by clicking on a button, link or similar feature. The parties
acknowledge that no technology exists to prevent the unauthorized transmission,
distribution, downloading or printing of Books. MotherNature agrees that, in
the event that such technology exists in the future, it will use commercially
reasonable efforts, taking cost effective technological feasibility into account
to install or to make operative as a part of the Internet Site software which
prevents the unauthorized transmission, distribution, downloading or printing of
Books.
The rights granted by this Section 3.2 shall be Exclusive for a period
which, with respect to each particular Book, is the shorter of:
(i) Five (5) years from the date on which MotherNature Web
Enables such Book; or
(ii) The balance of the term of this Agreement.
(c) Excerpts. MotherNature shall have the right to use, reproduce,
--------
have reproduced, display, and transmit Excerpts on the Internet Site, provided
that each Excerpt shall:
(i) Identify the name of the Book from which such Excerpts is
extracted; and
(ii) Contain a click-to-buy feature as set forth in Section
3.4(ii), hereof; and
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(iii) All Excerpting shall maintain the editorial integrity of
the health information contained in the Content from which the Excerpt was
taken or created.
3.3 Schedule A Designations.
-----------------------
(a) Rodale represents and warrants that Schedule A contains a full,
complete and accurate list of the titles of all Books previously published by
Rodale that are available for sale in the current (Fall 1999) Rodale retail book
catalog and the principal editorial content of which is within one (1) or more
of the Categories. Schedule A shall be binding and conclusive unless objected
to by MotherNature within six (6) months of the date of this Agreement. In the
event of an objection by MotherNature, Rodale and MotherNature shall devote
their mutual good faith and best efforts to resolve the objection. If
MotherNature's objection cannot be resolved within thirty (30) days after such
objection has been delivered to Rodale, the dispute shall be resolved by
arbitration pursuant to Section 3.3(d).
(b) Periodically during the term of this Agreement, but not less
frequently than three (3) times per year, Rodale shall furnish to MotherNature:
(i) A list of the titles of all Books published by Rodale since
the later of the date of this Agreement or the date of the most recent
endorsement to Schedule A (which list may include subsequent editions
correcting, modifying or otherwise editing prior editions of Books
appearing on Schedule A and/or prior endorsements to Schedule A); and
(ii) A proposed endorsement to Schedule A setting forth the
titles of those Books and Relevant Chapters which Rodale had determined to
be Content.
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Rodale's proposed endorsement(s) to Schedule A shall be binding and conclusive
unless objected to by MotherNature within ninety (90) days of receipt. In the
event of an objection by MotherNature, Rodale and MotherNature shall devote
their mutual good faith and best efforts to resolve the objection. If
MotherNature's objection cannot be resolved within thirty (30) days after such
objection has been delivered to Rodale, the dispute shall be resolved by
arbitration pursuant to Section 3.3(d).
(c) Under Rodale's customary contracts with outside authors, Rodale's
rights to license Book(s) or Relevant Chapter(s) may terminate if the Book is no
longer in print. Rodale also, from time to time, withdraws Books from
publication and distribution when, in Rodale's judgment, the information
contained in a Book has become stale or inaccurate. If Rodale determines that
the rights to license to MotherNature Content now or hereafter listed on
Schedule A or an endorsement thereto have terminated or are about to terminate,
or if Rodale withdrawn a Book from publication and distribution because, in
Rodale's judgment, the information contained in such Book(s) has become stale or
inaccurate, Rodale shall give to MotherNature notice that such Content shall be
withdrawn from Schedule A, effective thirty (30) days from the giving of such
notice. Rodale's notice shall be binding and conclusive unless objected to by
MotherNature within thirty (30) days of receipt. In the event of an objection
by MotherNature, Rodale and MotherNature shall devote their mutual good faith
and best efforts to resolve the objection. If MotherNature's objection cannot
be resolved within thirty (30) days after such objection has been delivered to
Rodale, the dispute shall be resolved by arbitration pursuant to Section 3.3(d).
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Any Book(s) or Relevant Chapter(s) withdrawn from Schedule A pursuant to
this Section 3.3(c) shall no longer be Content and shall be removed by
MotherNature from the Internet Site within thirty (30) days.
(d) Unresolved disputes under Sections 3.3(a), 3.3(b) and 3.3(c) shall
be resolved by arbitration before a single arbitrator who shall conduct his or
her arbitration proceedings in New York, New York. The arbitration shall be
administered by the American Arbitration Association in accordance with its
Commercial Arbitration Rules, and Rodale and MotherNature shall equally divide
the arbitrator's fees and the administrative costs. Judgment on the
arbitrator's award may be entered in, and enforced by, any court of competent
jurisdiction.
3.4 Book Selection. MotherNature agrees that it shall Web Enable the
--------------
Content and incorporate such Web Enabled Content into MotherNature's online
library, all to the extent that MotherNature, after reasonable consultation with
Rodale with respect thereto, in its reasonable business judgment deems such
actions to be commercially desirable.
(a) The Library. MotherNature and Rodale will cooperate to commence
-----------
creation of the Web Enabled Library within thirty (30) days of the date of this
Agreement. The Internet Site shall have the following functionality with
respect to the Library:
(i) The Library will be a major category, currently denominated
as a "tab" on the Internet Site home page. Rodale and MotherNature shall
consult in good faith concerning the title of the Library "tab".
(ii) MotherNature shall be entitled to merchandise products on
the same page as Content is displayed, but such merchandising shall occur
in a clearly defined,
10
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segregated area. Editorial integrity of the Content shall be maintained.
MotherNature agrees that Content, when used on the same page as product
merchandising content, may not be editorially modified (except by
Excerpting), but may be modified as to typeface, size and format. The
parties shall mutually agree to the general layout and format of all
merchandising areas.
(iii) All references to Rodale Book titles throughout the
Internet Site will include a purchase link, enabling visitors to the site
to "click" on any Rodale book title and proceed directly to a purchase
("click-to-buy") page. The function to "click-to-buy" a Rodale Book shall
not directly link the Internet Site user to the print publications of any
person or entity other than Rodale.
(b) Book Sales.
----------
(i) The Internet Site shall contain a special "Rodale Book"
section which permits the visitor to "click-to-buy", and which shall offer
for sale Rodale Books, selected at the discretion of MotherNature,
appropriate to the section of the Internet Site that the customer is
viewing. The special "Rodale Book" section will consist of not fewer than
fifty (50) Rodale Books.
(ii) Book Pricing and Stock. MotherNature in its sole discretion
----------------------
will stock fast moving Books in its warehouse. MotherNature and Rodale
agree that slower moving Books will not be stocked at MotherNature's
warehouse, but will be maintained in Rodale's warehouse and shipped to
MotherNature's warehouse upon receipt of orders, which orders will be
transmitted from MotherNature to Rodale via the World Wide Web. Rodale
11
<PAGE>
agrees to sell Books to MotherNature in accordance with the Special Markets
Discount Schedule (the "Schedule") attached hereto as Schedule B, which
Schedule is incorporated herein by reference as though set forth fully.
Throughout the term of this Agreement, Rodale agrees to modify the Schedule
in accordance with the most favorable discounts, terms and conditions
offered to any purchaser of the kind described on Schedule B. The sale of
Books to MotherNature is non-exclusive.
(c) Trial Basis Sales. Within six (6) months from the date of
-----------------
execution of this Agreement, MotherNature will create a separate Rodale Book
section on the Internet Site for sale of Rodale Books on a "Trial Basis". Said
section shall be co-branded by MotherNature and Rodale. Customers will have the
ability to order a selection of Rodale Books on a free trial basis. The section
shall be constructed to provide that orders will be made directly to Rodale, and
not through MotherNature. With respect to all Books sold in the Trial Basis
section of the Internet Site, Rodale agrees to pay to MotherNature a commission
equal to the highest rate of commission (but not less than twenty (20%) percent)
on Net Sales (gross sales less accruals for returns and bad debt (estimated by
Rodale in its commercial good faith, based on Rodale's actual experience),
exclusive of postage, handling and sales tax) being paid to any third party
internet seller of Rodale Books.
Rodale will pay such commissions to MotherNature on a quarterly basis,
not later than thirty (30) days after the end of each calendar quarter, and
Rodale shall provide to MotherNature a statement providing reasonable detail as
to the number of Books sold on a Trial Basis and Net Sales therefrom.
12
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(d) Third Party/Remote Web Sites. MotherNature shall have the right
----------------------------
to repurpose a de minimis portion of the Content for use as a "teaser" on any
----------
MotherNature controlled or operated website on the World Wide Web or third party
remote content sites managed by or affiliated with MotherNature, subject to the
prior approval by Rodale of such third party remote content site, which approval
shall not be unreasonably be withheld.
(f) Author Compensation. With respect to Rodale Books and Relevant
-------------------
Chapters authored by non-Rodale employees as identified on Schedule A,
MotherNature agrees to pay to Rodale a licensing fee of Five Thousand
($5,000.00) Dollars for each Book or Relevant Chapter which is Web Enabled.
Payment shall be due from MotherNature to Rodale upon the execution of this
Agreement for those Books authored by non-Rodale employees identified on
Schedule A.
With respect to non-Rodale employee authored Books and Relevant
Chapters published by Rodale after the date of this Agreement and which become a
part of Schedule A by endorsement thereto pursuant to Section 3.3(b), Rodale
shall use commercially reasonable efforts to obtain Web Enablement rights from
the authors thereof. With respect to any Book which is added to Schedule A by
endorsement and is thereafter Web Enabled, and each Book from which one (1) or
more Relevant Chapter(s) are added to Schedule A by endorsement and such
Relevant Chapter(s) are thereafter Web Enabled, MotherNature shall pay to Rodale
a fee of Five Thousand ($5,000.00) Dollars per Book. Such fee shall be payable
by MotherNature to Rodale within thirty (30) days of completion of Web
Enablement of such Book(s) or Relevant Chapters.
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3.5 Health Sieve Distribution and News Clipping Exchange.
----------------------------------------------------
(a) Health Sieve. Rodale will provide distribution of its Health
------------
Sieve to MotherNature in the same format and on the same frequency as provided
to Rodale employees. Rodale's Health Sieve may be incorporated into
MotherNature's news services. MotherNature shall have the right to modify the
Health Sieve and to use, reproduce, have reproduced, display, and transmit the
Health Sieve in any form on the Internet Site. At Rodale's request,
MotherNature shall display a credit to Rodale in such form as is mutually agreed
to by Rodale and MotherNature. In the event that MotherNature changes the
content of the Health Sieve, MotherNature will have sole responsibility for such
changes. Except as provided herein, no publication, distribution, sale,
assignment or license of Rodale's Health Sieve or any portion thereof shall be
made by MotherNature without the prior written approval of the President, Rodale
Book Division, or his designee, which approval shall be at the sole discretion
of such individual.
(b) News Services. MotherNature will distribute its news services to
-------------
Rodale in the same format and with the same frequency as MotherNature
distributes to its employees and/or customers.
(c) Exclusivity. The obligations of MotherNature and Rodale relative
-----------
to news clipping and news alert services and the Health Sieve shall be non-
exclusive.
3.6 Consultation with Rodale Researchers. Rodale will provide
------------------------------------
consultation with Rodale's researchers to MotherNature for not more than eight
(8) hours per week, non-cumulative, during the term of this Agreement.
14
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(a) Exclusivity. The rights granted with respect to consultation with
-----------
Rodale researchers shall be non-exclusive.
3.7 Question and Answer Column. Rodale agrees that its authors, writers,
--------------------------
editors or experts will provide two (2) new columns per month during the term of
this Agreement in a question and answer format for display on the Internet Site.
Each column shall consist of no more than three (3) questions, and each answer
shall be no longer than three hundred (300) words.
The parties have discussed the possibility that Rodale's authors and
editors will participate in online "chats", the nature and extent of which shall
be subject to the mutual agreement of the parties with respect thereto.
(a) Exclusivity. The rights granted with respect to the question and
-----------
answer column shall be non-exclusive.
3.8 Assistance in Publishing MotherNature Books.
-------------------------------------------
(a) Publication. Rodale agrees to custom publish, at the request of
-----------
MotherNature, a series of books in the English language carrying the
MotherNature imprint, such series not to exceed twenty (20) such books during
the term of this Agreement. Rodale and MotherNature agree that Rodale shall be
obligated to publish not fewer than three (3) nor more than six (6) books during
the first year of the term of this Agreement. The number of books to be
published in subsequent years shall be as mutually agreed, but shall not exceed
three (3) books in any one year. MotherNature acknowledges that the content of
such book may be based upon re-purposed material. Rodale and MotherNature shall
mutually agree with respect to the outline, content, trim size and number of
pages of each book in the series.
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(b) Cost. MotherNature shall pay to Rodale the cost of publication,
----
including internal labor costs for writing, editing, research and design, paper,
pre-press, printing and binding, plus seven and one-half (7.5%) percent of all
costs. Prior to the commencement of any custom publishing process, the parties
will agree to a budget with respect to the cost.
(c) Distribution. Rodale shall have the right, at its sole option, to
------------
distribute such books to the Trade (bookstores, both physical and electronic,
and other retail outlets which sell books). In the event that Rodale chooses to
distribute such books to the Trade, then MotherNature shall have the right to
distribute such books in all non-Trade channels of distribution in the United
States. In the event that Rodale chooses not to distribute such books to the
Trade, then MotherNature shall have the right to distribute such books in the
Trade and in all non-Trade channels of distribution within the United States.
(d) Copyright Ownership. MotherNature agrees that Rodale shall be the
-------------------
owner of the copyright and all other intellectual property to such books as are
published in accordance with this section. MotherNature acknowledges that
ownership of each book shall be solely and exclusively vested in Rodale.
MotherNature agrees that each book is a work-for-hire within the meaning of the
copyright law, and Rodale will be considered the owner of each book for all
purposes, including copyright. To the fullest extent permitted by law,
MotherNature hereby assigns any copyright which it may acquire in any of the
books to Rodale for the duration of the copyright and any extensions thereof.
MotherNature appoints Rodale its attorney-in-fact to execute any documents
necessary to transfer and assign any copyright interest of MotherNature in the
books to Rodale.
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(e) Exclusivity. The obligations of Rodale with respect to this
-----------
section shall be non-exclusive.
3.9 Access to Electronic Image Library.
----------------------------------
(a) Stock Images. Rodale grants to MotherNature electronic access to
------------
Rodale's Stock Images for use on the Internet Site. The right to use Stock
Images other than on the Internet Site or Co-Branded MotherNature Internet Sites
will be subject to Rodale's prior approval, which may be granted or refused at
Rodale's sole discretion.
(b) Exclusivity. The rights granted to MotherNature under this
-----------
section are non-exclusive.
3.10 Recipes.
-------
(a) Recipes. Rodale grants to MotherNature the right to create a
-------
separate content section within the Internet Site which utilizes Rodale's
recipes from Content included on Schedule A. MotherNature shall, as it deems
appropriate, link such recipes to medical conditions contained within the
Library and other information areas of the Internet Site.
(b) Links. Each recipe shall contain a reference to the title of the
-----
Rodale Book in which such recipe appeared and a link to a "click-to-buy" page,
by which consumers can purchase such Book.
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4. MARKETING RELATIONSHIP
----------------------
4.1 Access to Customer Databases.
----------------------------
(a) Access. MotherNature and Rodale will each have reasonable access
------
to the customer database of the other for direct marketing acquisition and
direct marketing retention by means of conventional direct mail marketing
methods or by means of e-mail direct marketing methods, and ad hoc customer
analysis by either party for its own purposes. Such access shall be limited as
follows:
(i) Access shall be subject to the privacy policies of
MotherNature and Rodale which may limit the release of individual customer
identification; and
(ii) Except as provided in Section 12.2 of this Agreement,
neither party shall sell, transfer, assign, share or otherwise permit any
third party to have access to or use any information which it obtains from
the customer database of the other.
As a permitted use, for example, MotherNature may perform an N-th name
select and send an offer to a random sample of Rodale's database. Using
purchase behavior information, the parties database analysts will develop agreed
upon optimal communications plan that will guide each in the selection of names
from the other's database. Each party agrees to reimburse the other for third
party costs incurred as a result of that party's access to the other party's
customer database.
(b) Exclusivity. The rights granted to MotherNature under this
-----------
section shall be Exclusive.
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(c) Term. Notwithstanding any other section of this Agreement, the
----
term of the license granted in this Section 4.1 shall be for a period of seven
(7) years commencing on the date Effective Date of this Agreement.
4.2 Magazine and Book Purchases for Promotional Use.
-----------------------------------------------
(a) Book Purchases. Rodale grants to MotherNature the right to
--------------
purchase Books for promotional use with other MotherNature products, except
Rodale Books, at Rodale's cost (paper, printing, binding and pre-production
costs) plus five (5%) percent of all such costs.
(b) Magazine Purchases. MotherNature may request from each Rodale
------------------
magazine publisher or circulation manager the right to purchase magazines for
promotional use. The right to such purchase, including quantity and price,
shall be as determined by the mutual agreement of the parties, if any.
(c) Exclusivity. The rights granted in this section are non-
-----------
exclusive.
4.3 Offer Inserts in Book and Invoice Shipments.
-------------------------------------------
(a) Inserts. Rodale grants MotherNature the right to insert
-------
promotional materials in up to five million (5,000,000) Book shipments or
billing statements per year throughout the term of this Agreement. MotherNature
may request that its promotional materials be inserted into shipments of, or
invoices for, specific Rodale Book titles, and Rodale will use its best efforts
to perform the insertions in the shipment or invoicing of such specific titles.
(b) Specifications. Specifications for such inserts shall conform in
--------------
format, size and weight to Rodale requirements. MotherNature shall, at its
cost, produce its own advertisements and provide printer-ready copy and art to
Rodale.
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(c) Incremental Costs. In the event that postage and handling of such
-----------------
inserts will result in an incremental cost incurred by Rodale, Rodale shall
advise MotherNature in advance with respect to such costs. In the event that
MotherNature approves and accepts such costs, MotherNature shall be responsible
for and shall pay to Rodale, within thirty (30) days of billing, all such
incremental costs. In the event that MotherNature does not approve and accept
such costs, then such insert shall be not processed or inserted into any Book
shipments or billing statements.
(d) Exclusivity. The rights granted in this section shall be
-----------
Exclusive.
4.4 Magalogs.
--------
(a) Rodale agrees to consider, subject to availability and successful
testing, in its sole discretion, a listing for MotherNature in Rodale magalogs.
(b) The rights granted by this Section shall be non-exclusive.
4.5 Magazine Cross-Promotion.
------------------------
(a) Prevention Advertising and Supplement News. Rodale agrees to
------------------------------------------
provide to MotherNature the following:
(i) One (1) four-color full page advertisement for the Internet
Site in six (6) issues of Prevention magazine per year;
----------
(ii) One (1) four-color full page advertisement for the Internet
Site in twelve (12) issues of Prevention specials per year;
----------
(iii) The right to use, as is and unaltered, the Prevention
----------
columns titled "Supplement News" and "Alternative Medicine News" on the
Internet Site. Such posting of each column on the Internet Site shall take
place no sooner than sixty (60) days after the on
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sale date of the Prevention issue in which it appears and shall include the
----------
following legend: "By permission from Prevention Magazine; (C)Rodale Inc.
----------
1999" (or other appropriate year). In the event that either "Supplement
News" or "Alternative Medicine News" is no longer published in Prevention
----------
magazine, the rights granted by this paragraph shall apply to comparable
columns of the magazine, as may be agreed upon by the parties from time to
time. The rights granted with respect to these columns shall be Exclusive;
(iv) Advertising provided to MotherNature pursuant to Section
4.5(a)(i) and 4.5(a)(ii) shall be without charge to MotherNature provided
that advertising materials are received by Rodale in accordance with the
specifications of the then current rate card for Prevention magazine.
----------
4.6 Co-Marketing Opportunities. MotherNature will provide cross-selling
--------------------------
promotions to Rodale for use in its subscription publications and sell-through
support. The scope and nature of such activities shall be mutually agreed upon
by Rodale and MotherNature.
4.7 Technology Exchange. The parties agree to engage in an ongoing
-------------------
exchange of technology ideas and information. Subject to mutual agreement, each
party may share such ideas and information with the other as may be helpful in
selling the products of the other party and in the promotion and advancement of
the Internet Site. Notwithstanding the foregoing, neither party shall be
obligated at any time to release to the other any confidential information or
trade secrets.
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5. CONSIDERATION; BOARD OF DIRECTORS
---------------------------------
5.1 Consideration. In consideration of the rights and licenses granted by
-------------
Rodale under this Agreement, and Rodale's other obligations under this
Agreement, MotherNature agrees to enter into and perform the Purchase Agreement
(as hereinafter defined).
5.2 Board of Directors. Rodale shall have observer rights with respect to
------------------
MotherNature's Board of Directors in accordance with Article 5.01(k) of the
Purchase Agreement (as hereinafter defined). In addition to the foregoing,
MotherNature agrees that for so long as Rodale owns not less than four (4%)
percent on a fully diluted basis of the issued and outstanding common stock of
MotherNature, and Rodale is not in default of Section 11.2 of this Agreement,
MotherNature agrees to use its best efforts to secure the nomination of a Rodale
representative to the Board of Directors of MotherNature and agrees to recommend
to the Shareholders of MotherNature that such representative be elected to the
Board of Directors.
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6. WARRANTIES AND RIGHTS
---------------------
6.1 Warranties of Rodale. With respect to all Content listed on Schedule
--------------------
A, Rodale represents, warrants and covenants that, except as is set forth on
Schedule 6.1 attached hereto and incorporated herein by this reference, or as is
set forth on an endorsement to Schedule 6.1 delivered in connection with an
endorsement to Schedule A pursuant to Section 3.3(b), it has obtained, or shall
obtain prior to delivery of such Content to MotherNature, all permissions and
releases which are necessary to grant to MotherNature the license set forth
herein. Rodale further represents, warrants and covenants that Schedule 6.1 is
full, complete and accurate. Rodale represents, warrants and covenants that,
notwithstanding any exceptions set forth on Schedule 6.1, Rodale has obtained
all permissions and releases which are necessary to grant to MotherNature the
license set forth herein for not less than ninety-five (95%) percent of the
total, editorial text, in the aggregate, contained in those Books which are
listed on Schedule 6.1. Rodale represents and warrants that as of the date
hereof, nothing in the Content is obscene, nothing in the Content infringes upon
the rights of any party, is libelous or violates the copyrights, trademarks,
intellectual property rights or rights of privacy or publicity of any party
whatsoever and the licensing and use by MotherNature of Content in accordance
with the terms of this Agreement will not infringe or violate the copyrights,
trademarks, intellectual property rights, or rights of publicity or privacy of
any party whatsoever. The delivery of new Content by endorsement to Schedule A
pursuant to Section 3.3(b) of this Agreement shall constitute a reaffirmation of
the representations and warranties contained in this Section with respect to the
new Content. Rodale warrants that it has the right to license the Trademark to
MotherNature and that the license of the Trademark does not constitute a
violation or infringement of any trademark or other right in the Trademark.
Rodale covenants and agrees to pay
23
<PAGE>
any royalties or similar compensation payable to any party by reason of the
licensing of the Content to MotherNature under this Agreement.
Rodale represents and warrants that:
(a) The determination by Rodale's Board of Directors of the fair
market value of the shares of common stock issued pursuant to the Stock Purchase
Agreement of even date herewith between the parties hereto (the "Purchase
Agreement") was made in good faith, based upon an independent third party
assessment of fair market value, and the description of such valuation that was
previously delivered to MotherNature is accurate;
(b) No authorization, approval or permission of, nor filing with, the
Federal Trade Commission by or on behalf of either Rodale or MotherNature is
required in connection with the execution of this Agreement and/or the issuance
and sale of the shares of common stock pursuant to the Purchase Agreement.
6.2 Warranties of MotherNature. MotherNature represents and warrants that
--------------------------
as of the date hereof, nothing contained on the Internet Site is obscene and, to
its knowledge, nothing contained on the Internet Site infringes upon the rights
of any party, is libelous, violates the copyrights, trademarks, intellectual
property rights, rights of privacy or publicity of any party whatsoever.
MotherNature covenants that is shall use commercially reasonable efforts to
ensure that nothing on the Internet Site will infringe upon the rights of any
party, be libelous, obscene, violate the copyrights, trademarks, intellectual
property rights, rights of privacy or publicity of any party whatsoever.
24
<PAGE>
(a) MotherNature further represents that:
(i) The performance of any of the matters provided for in this
Agreement is not contrary to any material statute, rule, regulation or
order, the violation of which would have a material adverse affect on
MotherNature's or Rodale's business or operations; and
(ii) All activities of the parties with reference to the Internet
Site as contemplated by this Agreement are in compliance with all current
material laws related to the to the promotion and sale of drugs, dietary
supplements, herbal products, vitamins and minerals as governed by the Food
and Drug Administration and the Federal Trade Commission, the violation of
which would have a material adverse affect on MotherNature's or Rodale's
business or operations. MotherNature represents that it has consulted with
counsel expert in such matters and covenants that it shall consult
regularly with counsel expert in such matters with respect to continued
compliance with all material statutes, rules, regulations and orders of any
applicable authority, including without limitation, the Food and Drug
Administration and the Federal Trade Commission. MotherNature covenants
that it shall consult regularly with Rodale regarding all of such matters
throughout the term of this Agreement; and
(iii) MotherNature covenants and agrees with Rodale that the
Internet Site shall not advertise, sell or promote the sale of products for
the production of genetically-altered crops, livestock, or other
foodstuffs. In the event that Rodale claims that MotherNature is in
violation of this covenant, Rodale shall give MotherNature notice of such
claim, specifying the alleged violation and requesting that it be cured.
In the event the
25
<PAGE>
parties are unable to resolve Rodale's objection within thirty (30) days of
such notice, the dispute shall be resolved by arbitration pursuant to
Section 3.3(d).
6.3 Preservation of Rights. MotherNature acknowledges that Rodale shall
----------------------
be and remain the sole proprietor of all intellectual property rights with
respect to the Content and the Trademark, including copyrights. In the event
that MotherNature obtains any right or interest in the Trademark or the Content
contrary to the intention of this Agreement, MotherNature shall promptly assign
and transfer such right or interest, free of charge, to Rodale or its designee.
MotherNature shall notify Rodale promptly of any violations, infringements or
misuses by third parties of Rodale's copyrights, trademarks, trade names, the
Content or the Trademark or other rights coming to its attention and shall
cooperate fully with Rodale in taking any action necessary to protect such
rights. MotherNature shall not be obligated to undertake any proceedings
relative to the Content and the Trademark. Rodale shall reimburse MotherNature
for any expenses reasonably incurred by MotherNature at Rodale's request and
with Rodale's prior approval. Rodale shall have the right to conduct legal
proceedings relating to the Content and the Trademark and shall, at its sole
discretion, determine what legal measures, if any, shall be undertaken with
respect to any infringement, alleged infringement or other violations of its
rights. MotherNature agrees to fully cooperate with Rodale as regards to the
prosecution of any such action, claim or proceeding.
26
<PAGE>
7. CONFIDENTIALITY
---------------
7.1 Each party to this Agreement acknowledges that it may receive
confidential information ("Confidential Information") of the other party. For
purposes of this Agreement, "Confidential Information" shall mean any trade
secret, information, process, technique, algorithm, computer program (source and
object codes), design, drawing formula, test data, business development and
marketing plans and concepts, records and files, financial data and budgetary
information, income or sales data or projections, customer lists, information
regarding customers, facilities, suppliers, plans or market analysis which is
provided by either party in writing or in electronic form.
7.2 Each party covenants, and agrees that:
(a) It will not, at any time, reveal, divulge, or make known to any
person, firm, corporation, or other entity any Confidential Information of the
other party;
(b) It will not publish, communicate, divulge, disclose or use such
information for any purpose not authorized by the other party, nor make copies
or disclose in any manner Confidential Information to any third party without
prior written consent of the other party;
(c) It will not use the Confidential Information of the other party
for any purpose except to the extent required to accomplish the intent of this
Agreement; and
(d) It will return to the other party or destroy any documents
(including copies, if any) containing Confidential Information of the other
party after the need for such information has expired, or upon the request of
the other party, and, in any event, upon completion or termination of this
Agreement.
27
<PAGE>
7.3 Each party shall take reasonable security precautions, at least as
great as the precautions it takes to protect its own trade secrets, with respect
to the Confidential Information which it receives and shall disclose
Confidential Information on a need to know basis only to its subsidiary, agent
or subcontractor who is obligated to treat the Confidential Information in a
manner consistent with all the obligations of this Agreement.
7.4 The term "Confidential Information" does not include information which
the receiving party can demonstrate:
(a) Is now or hereafter becomes available in the public domain, to the
publishing trade, or within the internet industry without improper disclosure by
the receiving party;
(b) Is known to the receiving party at the time of receipt of such
information;
(c) Is furnished to the receiving party by a third party without a
violation of this Agreement;
(d) Is the subject of written permission to disclose provided by the
other party; and
(e) Is independently acquired or developed by the receiving party, its
employees, agents, affiliates or advisors.
7.5 Each party agrees that any breach of obligations under this Section 7
shall be a material breach of this Agreement and result in irreparable harm to
the non-disclosing party for which damages would be an inadequate remedy and, in
addition to the rights and remedies otherwise available at law, the non-
disclosing party shall be entitled to equitable relief, including injunction, in
the event of such breach.
28
<PAGE>
7.6 The obligations contained in this Section 7, notwithstanding any other
provision of this Agreement, shall terminate and end, absolutely, one (1) year
after the date of termination or expiration of this Agreement.
7.7 The obligations contained in this Section 7 shall not apply to any
confidential information which is required to be disclosed by either party as a
result of law, regulation, court order or other legal process, provided that the
party required to make such disclosure shall give prompt notice, and in all
events prior to such disclosure, to the other party of the requirement of
disclosure and all material information relevant thereto to enable such party to
seek an appropriate protective order or other relief from an appropriate court
or agency.
8. INDEMNIFICATION
---------------
8.1 Rodale shall indemnify MotherNature and hold MotherNature harmless
from and against any and all liabilities, losses, damages, claims, payments,
judgments, costs and expenses (including attorneys' fees) suffered or incurred
by MotherNature as a result of any claim or cause of action arising out of or
relating to:
(a) Rodale's performance or failure to perform its obligations under
this Agreement; or
(b) Arising out of any breach or alleged breach of Rodale's covenants,
representations and warranties contained in Section 6 of this Agreement; or
29
<PAGE>
(c) Arising out of any claim by any user of the Internet Site that the
Content caused personal injury or illness, provided, however, that there shall
be excluded from indemnification obligation imposed by this Section 8.1(c):
(i) Claims founded solely upon the use or ingestion of products
sold or supplied by MotherNature; and
(ii) Claims arising from any editorial Excerpting of Content by
MotherNature which failed to maintain the editorial integrity of the health
information contained in the Content from which the Excerpt was taken or
created.
8.2 MotherNature shall indemnify Rodale and hold Rodale harmless from and
against any and all liabilities, losses, damages, claims, payments, judgments,
costs and expenses (including attorneys' fees) suffered or incurred by Rodale as
a result of:
(a) Any claim or cause of action arising out of or relating to
MotherNature's performance or failure to perform its obligations under this
Agreement; or
(b) Arising out of any breach or alleged breach of MotherNature's
representations, warranties and covenants contained in Section 6 of this
Agreement; or
(c) Any claim or cause of action against Rodale, except for any claim
or cause of action relating to Content included on the Internet Site in
compliance with this Agreement, alleging that anything contained in the Internet
Site infringes upon the rights of any party, is libelous, is obscene, violates
the copyrights, trademarks, intellectual property rights, rights of privacy or
rights of publicity of any party whatsoever.
(d) Any claim or cause of action against Rodale alleging that
30
<PAGE>
(i) The performance of any of the matters provided for in this
Agreement is contrary to any material statute, rule, regulation or order,
the violation of which would have a material adverse affect on
MotherNature's or Rodale's business or operations or the activities of the
parties with reference to the Internet Site, fail to comply with all then
current material laws relating to the promotion and sale of drugs, dietary
supplements, herbal products, vitamins and minerals as governed by the Food
and Drug Administration and the Federal Trade Commission.
9. DEFAULT
-------
9.1 Default means:
(a) The failure of either party to perform any material obligation
under this Agreement which failure is not remedied within thirty (30) days after
receipt of written notice from the other party demanding such remedy; or
(b) The failure of either party to indemnify and hold the other
harmless in accordance with Section 8 of this Agreement, which failure to
provide indemnity shall not be remedied within thirty (30) days after receipt of
written notice demanding such indemnity; or
(c) The entry of any judgment, final order or decree against either
party with respect to any matter which is the subject of indemnification by the
other party under Section 8 of this Agreement.
31
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9A. CHANGE OF CONTROL
-----------------
9A.1 MotherNature shall give Rodale notice of the occurrence of a Change
of Control of MotherNature. Within thirty (30) days after Rodale's receipt of
such notice Rodale may elect to exercise its rights under this Section 9A.1. If
Rodale elects to exercise its rights, then, following, the expiration of thirty
(30) days following the giving of such notice: the license granted to
MotherNature by Section 4.1 of this Agreement to access Rodale's customer
database shall be limited to only customer name, address, and e-mail address
selections for the purpose of promoting visits to the Internet Site.
Specifically, access to the Rodale customer database for ad hoc customer
analysis purposes shall terminate. The successor to, or party acquiring
control, of MotherNature shall, likewise, give to Rodale thirty (30) days notice
of a second or subsequent Change of Control, and Rodale's rights under this
Section 9A.1 shall again be exercisable in respect to such second or subsequent
Change of Control.
9A.2 If during the period of twelve (12) consecutive months following a
Change of Control of MotherNature, the revenue received by Rodale from the sale
of Books (pursuant to Sections 3.4(b) and 3.4(c) of this Agreement) declines by
twenty-five (25%) percent or more from the revenue received by Rodale from the
sale of Rodale Books during the period of twelve (12) consecutive months
preceding the Change of Control of MotherNature, Rodale may give notice thereof
to MotherNature. Upon the expiration of thirty (30) days following the giving
of such notice, all Exclusive rights and licenses granted by Rodale to
MotherNature under this Agreement shall become non-exclusive unless
MotherNature, during such thirty (30) day period, pays to Rodale a sum of money
equal to the difference between the Book sale revenue by Rodale during the
twelve (12) month period after the Change of Control of MotherNature, and
seventy-five (75%) percent of the
32
<PAGE>
Book sale revenue received by Rodale during the twelve (12) months preceding the
Change of Control of MotherNature. Rodale's rights under this Section 9A.2 are
exercisable annually, in respect of each anniversary of the Change of Control of
MotherNature during the remainder of the term of this Agreement.
10. TERMINATION
-----------
10.1 This Agreement may be terminated by written notice from the
terminating party to the non-terminating party, notwithstanding any other
provision of this Agreement, upon the occurrence of any of the following events:
(a) By either party, upon the expiration of the term set forth in
Section 2.1 above;
(b) By either party, in the event of default by the other;
(c) By Rodale, in the event that the Internet Site is not available to
consumers for a period of at least seven (7) consecutive days at any time during
the term of this Agreement (after initial launch of the Internet Site), and the
Internet Site has not been restored to functionality substantially equivalent to
its functionality prior to the interruption within a period of an additional
seven (7) consecutive days following notice by Rodale to MotherNature requesting
that the interruption be cured; provided, however, that Rodale shall not have
the right to terminate this Agreement if the interruption of the availability of
the Internet Site to consumers is caused by:
33
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(i) An act of God; or
(ii) Acts of third parties beyond MotherNature's control, and
such third party acts are not due to the violation of any law or regulation
by MotherNature;
(d) By Rodale, in the event that MotherNature fails to provide updated
Content to the Internet Site for a period in excess of thirty (30) days at any
time during the term of this Agreement; and such failure to provide updated
Content is not cured within five (5) days of notice from Rodale to MotherNature.
(e) By either party, in the event that bankruptcy, receivership,
liquidation or Chapter 11 proceedings are filed against either party to this
Agreement which is not stayed or discharged within thirty (30) days of
commencement;
(f) By Rodale, in the event that the Internet Site advertises, sells
or promotes the sale of alcohol (excluding beer or wine), tobacco products, or
non-organic fertilizers, and such advertising or promotion is not removed from
the Internet Site within fifteen (15) days notice from Rodale to MotherNature
requesting such removal.
10.2 Effect of Expiration or Termination. Upon the expiration or
-----------------------------------
termination of this Agreement:
(a) Cessation of Activities. Each party shall cease to perform all
-----------------------
services for the other party as described in this Agreement. Each party shall
discontinue any promotional services for or on behalf of the other.
(b) Survival. The rights and obligations of the parties under the
--------
following Sections shall survive any expiration or termination of this
Agreement: Sections 6, 7, 8, 10 and 12.
34
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(c) Trademark. MotherNature shall remove the Trademark from its
---------
Internet Site and shall have no further right to use the Trademark pursuant to
the license granted under this Agreement.
(d) MotherNature shall, at Rodale's option: (1) return to Rodale all
of the Content (including Modifications) or (2) destroy all of the Content and
Modifications, which destruction shall be certified by the Affidavit of the
Chief Executive Officer of MotherNature. MotherNature shall make no further
use, display or reproduction of the Content or Modifications; MotherNature shall
make no derivative works of the Content; and all rights with respect to the
Content and Modifications shall revert exclusively to Rodale, in all media.
(e) MotherNature shall promptly execute and deliver to Rodale any
document(s) requested by Rodale to accomplish the objectives of this Section
10.2.
11. NON-COMPETITION
---------------
11.1 During the term of this Agreement, MotherNature agrees that it shall
not directly or indirectly through a subsidiary, affiliate or joint venture:
(a) Publish for distribution and sale to the general public print
Books or print magazines (excluding online materials that may be printed from a
computer) on the subjects of health, vitamins, minerals, dietary supplements,
medicinal herbs, natural healing, alternative medicine (including aromatherapy
and homeopathy), cooking, home health remedies, pets or gardening, except upon
the prior written consent of Rodale.
35
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(i) Notwithstanding the foregoing, in the event that during of
this Agreement, MotherNature proposes to publish a magazine on the subjects
health, vitamins, minerals, dietary supplements, medicinal herbs, natural
healing, alternative medicine (including aromatherapy and homeopathy),
cooking, home health remedies, pets or gardening, then the following shall
apply:
(1) MotherNature shall first offer to Rodale the right to
act as publisher of the magazine. For a period of not less than
ninety (90) days, Rodale and MotherNature shall negotiate, in best
faith efforts, to reach agreement as to the publication and
distribution of the proposed magazine by Rodale on MotherNature's
behalf. In the event that MotherNature and Rodale are,
notwithstanding best faith efforts, unable to reach agreement as to
Rodale's publication of such magazine, then MotherNature shall be free
to negotiate with any third party for the publication of that
magazine. In the event that the magazine is published by any party
other than Rodale, then MotherNature agrees and acknowledges that the
Content may not be used in the proposed magazine in any way, it being
the intention of the parties that a magazine published by any party
other than Rodale shall have editorial content which is not the
Content, derivatives of the Content or modifications of the Content in
any respect.
(b) Engage in the business of selling to employer intranets health
information which does not also offer products for sale.
36
<PAGE>
11.2 During the term of this Agreement, Rodale agrees that it shall not
directly or indirectly through a subsidiary, affiliate or joint venture:
(a) Engage in the sale to consumers of vitamins, minerals, dietary
supplements, medicinal herbs, minerals, drugstore products (over the counter and
prescription products which are ingested or topically applied), or aromatherapy
or homeopathy products; or
(b) Invest in or acquire any other entity that is a Competitor under
the meaning of Section 1.5 hereof; provided, however, that Rodale shall not be
deemed to be in violation of this Section 11.2 solely by virtue of its
beneficial ownership of less than two and one-half (2.5%) percent of the
outstanding securities of any corporation whose securities are traded on a
national securities exchange.
12. MISCELLANEOUS
-------------
12.1 Service Interruptions. MotherNature and Rodale will endeavor to keep
---------------------
their respective websites and services operational at all time, but certain
technical difficulties may, from time to time, result in temporary service
interruptions. Neither party shall be liable to the other for any consequences
of such service interruptions.
12.2 Assignment. Neither party may assign or transfer any of the rights,
----------
duties or obligations hereunder to any party without the prior written consent
of the other. Subject to Section 9A., MotherNature may, without such consent,
assign its rights, duties or obligation hereunder to an acquirer of MotherNature
in connection with a Change of Control of MotherNature.
37
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12.3 Relationship of Parties. Rodale and MotherNature are independent
-----------------------
contractors and nothing in this Agreement is intended or will create any form of
partnership, joint venture, agency, franchise, sales representative or
employment relationship between the parties. Neither party has the authority,
without the other party's prior written approval, to bind or commit the other
party in any way.
12.4 Waiver. No waiver of any provision of the Agreement shall be
------
effective unless made in writing. No waiver of any breach of any provision of
the Agreement shall constitute a waiver of any subsequent breach of the same or
any other provision of the Agreement.
12.5 Governing Law and Dispute Resolution. Any dispute regarding the
------------------------------------
interpretation or validity hereof shall be governed by the laws of the
Commonwealth of Pennsylvania, U.S.A., exclusive of that body of law relating to
choice of law.
12.6 Severability. The provisions of this Agreement are severable. If
------------
any one (1) or more such provisions are judicially determined to be illegal or
otherwise unenforceable, in whole or in part, the remaining provisions or
portions of the Agreement shall be binding on and enforceable by and between the
parties hereto.
12.7 Audit. Each party shall have the right to audit or have its
-----
representatives audit the books and records of the other to assure compliance
with the provisions of this Agreement. In the event of any discrepancy
discovered by such audit, the amount of the discrepancy shall immediately be
paid, and in the event that such discrepancy exceeds five (5%) percent, the
audited party shall pay the reasonable costs of the audit not to exceed Two
Thousand Five Hundred ($2,500.00) Dollars.
38
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Audit rights may be exercised at the business location of either party hereto
and shall be exercisable on five (5) days notice during normal business hours.
12.8 Notices. All notices required or permitted under this Agreement will
-------
be in writing, will reference this Agreement and will be deemed given: (a) when
actually delivered; (b) when sent by confirmed facsimile; or (c) the next
business day after deposit with a commercial overnight carrier specifying next-
day delivery, with written verification of receipt. All communications will be
sent to the addresses set forth below or to such other address as may designated
by a party by giving written notice to the other party pursuant to this Section
12.8:
If to Rodale: Chief Financial Officer
------------
Rodale Inc.
33 East Minor Street
Emmaus, PA 18098-0099
Phone: (610) 967-8251
Fax: (610) 967-9154
with a copy to: Paul A. McGinley, Esquire
--------------
Gross, McGinley, LaBarre & Eaton, LLP
33 South 7th Street
P.O. Box 4060
Allentown, PA 18101
Phone: (610) 820-5450
Fax: (610) 820-6006
If to MotherNature: Chief Financial Officer
------------------
MotherNature.com, Inc.
One Concord Farms, Second Floor
490 Virginia Road
Concord, MA 01742
Phone: (978) 929-2020
Fax: (209) 797-6335
with a copy to: Howard S. Rosenblum, Esquire
--------------
Testa, Hurwitz & Thibeault, LLP
125 High Street
Boston, MA 02110-2704
Phone: (617) 248-7000
Fax: (617) 248-7100
39
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12.9 Counterparts. This Agreement may be executed in two (2) or more
------------
counterparts, each of which shall be deemed an original and which together shall
constitute one (1) instrument.
12.10 Licenses. The granting of rights by Rodale to MotherNature under
--------
this Agreement shall be deemed to be the granting of royalty-free, worldwide
licenses in the English or Spanish language, as published by Rodale, for the
applicable terms of such rights.
12.11 Publicity. Neither Rodale nor MotherNature shall, without the
---------
consent and advance approval of the other party, issue any publicity releases,
statements, or announcement concerning this Agreement or the transactions
contemplated hereby; provided that any such release, statement and/or
announcement may be made by either Rodale or MotherNature pursuant to any
governmental or regulatory requirement (but only after a reasonable attempt to
coordinate such release or announcement with the other party).
12.12 Entire Agreement. This Agreement, that certain Stock Purchase
----------------
Agreement entered into between Rodale and MotherNature constitute the entire
agreement between the parties and supersedes all prior agreements and
understandings between them relating to the subject matter hereof. No
modifications of the Agreement shall be binding on either party unless it is in
writing and signed by the party to be charged.
40
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IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the
day and year first above written, intending to be legally bound hereby.
RODALE INC.
BY: /s/ Placido Corpora
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
MOTHERNATURE.COM, INC.
BY: /s/ Michael Barach
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
41
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Page 1 of 6
Schedule A
Rodale Inc. & Mothernature.com
Summary of Rodale titles
Title
- --------------------------------------------------------------------------------
1 Age Erasers for Men
- --------------------------------------------------------------------------------
2 Age Erasers for Women
- --------------------------------------------------------------------------------
3 Age Protectors
- --------------------------------------------------------------------------------
4 Allergy Self-Help Cookbook
- --------------------------------------------------------------------------------
5 Banish Your Belly
- --------------------------------------------------------------------------------
6 Bicycling Magazine's Basic Maintenance and Repair
- --------------------------------------------------------------------------------
7 Bicycling Magazine's Bicycle Commuting Made Easy
- --------------------------------------------------------------------------------
8 Bicycling Magazine's Bike Touring in the '90s
- --------------------------------------------------------------------------------
9 Bicycling Magazine's Complete Guide to Bicycle Maintenance and Repair
- --------------------------------------------------------------------------------
10 Bicycling Magazines Complete Book of Road Cycling Skills
- --------------------------------------------------------------------------------
11 Bicycling Magazine's Cycling for Women
- --------------------------------------------------------------------------------
12 Bicycling Magazine's Long-Distance Cycling
- --------------------------------------------------------------------------------
13 Bicycling Magazine's Mountain Biking Skills
- --------------------------------------------------------------------------------
14 Bicycling Magazine's Nutrition for Cyclists
- --------------------------------------------------------------------------------
15 Bicycling Magazine' 600 Tips for Better Bicycling
- --------------------------------------------------------------------------------
16 Bicycling Magazine's Training for Fitness and Endurance
- --------------------------------------------------------------------------------
17 Bicycling Magazine's Training Techniques for Cycling
- --------------------------------------------------------------------------------
18 Body Shaping
- --------------------------------------------------------------------------------
19 Carnitine Defense
- --------------------------------------------------------------------------------
20 Cholesterol Cures
- --------------------------------------------------------------------------------
21 Complete Book of Alternative Nutrition, The
- --------------------------------------------------------------------------------
22 Complete Book of Natural and Medicinal Cures, The
- --------------------------------------------------------------------------------
23 Disease Free
- --------------------------------------------------------------------------------
24 Disease Free at 60-Plus
- --------------------------------------------------------------------------------
25 Doctor's Book of Home Remedies
- --------------------------------------------------------------------------------
26 Doctor's Book of Home Remedies (Spanish Edition)
- --------------------------------------------------------------------------------
27 Doctor's Book of Home Remedies for Children
- --------------------------------------------------------------------------------
28 Doctor's Book of Home Remedies for Children (Spanish Edition)
- --------------------------------------------------------------------------------
<PAGE>
Page 2 of 6
Schedule A
Rodale Inc. & Mothernature.com
Summary of Rodale titles
Title
- --------------------------------------------------------------------------------
29 Doctor's Book of Home Remedies for Men
- --------------------------------------------------------------------------------
30 Doctor's Book of Home Remedies for Preventing Disease
- --------------------------------------------------------------------------------
31 Doctor's Book of Home Remedies for Seniors
- --------------------------------------------------------------------------------
32 Doctor's Book of Home Remedies for Women
- --------------------------------------------------------------------------------
33 Doctor's Book of Home Remedies 11
- --------------------------------------------------------------------------------
34 Doctor's Book of Home Remedies 11 (Spanish Edition)
- --------------------------------------------------------------------------------
35 Dr.'s Duke's Essential Herbs
- --------------------------------------------------------------------------------
36 Extraordinary Togetherness
- --------------------------------------------------------------------------------
37 Fabulous Fat-Free Cooking
- --------------------------------------------------------------------------------
38 Fat to Form at Any Age
- --------------------------------------------------------------------------------
39 Female Body: An Owner's Manual
- --------------------------------------------------------------------------------
40 Fitness Instinct, The
- --------------------------------------------------------------------------------
41 Food and You
- --------------------------------------------------------------------------------
42 Food For The Spirit
- --------------------------------------------------------------------------------
43 French Culinary Institute's Salute to Healthy Cooking
- --------------------------------------------------------------------------------
44 Goal!
- --------------------------------------------------------------------------------
45 Green Pharmacy, The
- --------------------------------------------------------------------------------
46 Green Pharmacy, The
- --------------------------------------------------------------------------------
47 Curas de la cocina latina (Cures from the Latin Kitchen)
- --------------------------------------------------------------------------------
48 Curas naturales (Natural Cures)
- --------------------------------------------------------------------------------
49 Curas para el colesterol alto (Cures for High Cholesterol)
- --------------------------------------------------------------------------------
50 Hierbas milagrosas (Miracle Herbs)
- --------------------------------------------------------------------------------
51 Los mejores remedios caseros (The Best Home Remedies)
- --------------------------------------------------------------------------------
52 Secretos de la juventud para la mujer (Youth Secrets for Women)
- --------------------------------------------------------------------------------
53 Su peso ideal (Your Perfect Weight)
- --------------------------------------------------------------------------------
54 Tips-de belleza naturales (Natural Beauty Tips)
- --------------------------------------------------------------------------------
55 Hal Higdon's How To Train
- --------------------------------------------------------------------------------
56 Hal Higdon's Smart Running
- --------------------------------------------------------------------------------
<PAGE>
Page 3 of 6
Schedule A
Rodale Inc. & Mothernature.com
Summary of Rodale titles
Title
- --------------------------------------------------------------------------------
57 Healing Art of Sports Massage, The
- --------------------------------------------------------------------------------
58 Healing Foods, The (Spanish Edition)
- --------------------------------------------------------------------------------
59 Healing Herbs, The
- --------------------------------------------------------------------------------
60 Healing Herbs, The (Spanish Edition)
- --------------------------------------------------------------------------------
61 Healing with Motion
- --------------------------------------------------------------------------------
62 Health and Healing for African-Americans
- --------------------------------------------------------------------------------
63 Health Hints for Women
- --------------------------------------------------------------------------------
64 Healthy Cooking for Two (or Just You)
- --------------------------------------------------------------------------------
65 Healthy Homestyle Cooking
- --------------------------------------------------------------------------------
66 Healthy Hometown Favorites
- --------------------------------------------------------------------------------
67 Herbs For Health & Healing
- --------------------------------------------------------------------------------
68 Home Remedies: What Works
- --------------------------------------------------------------------------------
69 Home Remedies from the Country Doctor
- --------------------------------------------------------------------------------
70 Jacques Pepin's Simple and Healthy Cooking
- --------------------------------------------------------------------------------
71 Jeanne Jones' Healthy Cooking for People Who Don't Have Time To Cook
- --------------------------------------------------------------------------------
72 Jeanne Jones' Homestyle Cooking Made Healthy
- --------------------------------------------------------------------------------
73 Joan Samuelson's Running for Women
- --------------------------------------------------------------------------------
74 Lifetime of Sex
- --------------------------------------------------------------------------------
75 Low-Fat Living
- --------------------------------------------------------------------------------
76 Low-Fat Living Cookbook, The
- --------------------------------------------------------------------------------
77 Male Body: An Owner's Manual
- --------------------------------------------------------------------------------
78 Marathon
- --------------------------------------------------------------------------------
79 Masters Running and Racing
- --------------------------------------------------------------------------------
80 Men's Health Guide to Peak Conditioning, The
- --------------------------------------------------------------------------------
81 Men's Health Improvement Gdes: Command Respect
- --------------------------------------------------------------------------------
82 Men's Health Improvement Gdes: Death Defiers
- --------------------------------------------------------------------------------
83 Men's Health Improvement Gdes: Fight Fat
- --------------------------------------------------------------------------------
84 Men's Health Improvement Gdes: Food Smart
- --------------------------------------------------------------------------------
<PAGE>
Page 4 of 6
Schedule A
Rodale Inc. & Mothernature.com
Summary of Rodale titles
Title
- --------------------------------------------------------------------------------
85 Men's Health Improvement Gdes: Good Loving
- --------------------------------------------------------------------------------
86 Men's Health Improvement Gdes: Healing Power
- --------------------------------------------------------------------------------
87 Men's Health Improvement Gdes: Maximum Style
- --------------------------------------------------------------------------------
88 Men's Health Improvement Gdes: Money Savvy
- --------------------------------------------------------------------------------
89 Men's Health Improvement Gdes: Powerfully Fit
- --------------------------------------------------------------------------------
90 Men's Health Improvement Gdes: Sex Secrets
- --------------------------------------------------------------------------------
91 Men's Health Improvement Gdes: Stress Blasters
- --------------------------------------------------------------------------------
92 Men's Health Improvement Gdes: Stronger Faster
- --------------------------------------------------------------------------------
93 Men's Health Improvement Gdes: Symptom Solver
- --------------------------------------------------------------------------------
94 Men's Health Improvement Gdes: Vitamin Vitality
- --------------------------------------------------------------------------------
95 Mental Training for Peak Performance
- --------------------------------------------------------------------------------
96 Mountain Bike Like a Champion
- --------------------------------------------------------------------------------
97 Mountain Bike Magazine's Complete Gde to Mountain Biking Skills
- --------------------------------------------------------------------------------
98 Natural Medicine for Allergies
- --------------------------------------------------------------------------------
99 Natural Medicine for Arthritis
- --------------------------------------------------------------------------------
100 Natural Medicine for Back Pain
- --------------------------------------------------------------------------------
101 Natural Medicine for Heart Disease
- --------------------------------------------------------------------------------
102 Natural Prescriptions for Women
- --------------------------------------------------------------------------------
103 Nature's Cures
- --------------------------------------------------------------------------------
104 Nature's Medicines
- --------------------------------------------------------------------------------
105 New Choices in Natural Healing
- --------------------------------------------------------------------------------
106 Now Choices In Natural Healing for Women
- --------------------------------------------------------------------------------
107 New Classics Cookbook, The
- --------------------------------------------------------------------------------
108 New Vegetarian Cuisine
- --------------------------------------------------------------------------------
109 100% Pleasure
- --------------------------------------------------------------------------------
110 On The Run
- --------------------------------------------------------------------------------
111 Pain Remedies
- --------------------------------------------------------------------------------
112 Power Foods
- --------------------------------------------------------------------------------
<PAGE>
Page 5 of 6
Schedule A
Rodale Inc. & Mothernature.com
Summary of Rodale titles
Title
- --------------------------------------------------------------------------------
113 Power of 5, The
- --------------------------------------------------------------------------------
114 Practical Encyclopedia of Sex and Health, The
- --------------------------------------------------------------------------------
115 Prevention Magazine's Nutrition Advisor
- --------------------------------------------------------------------------------
116 PV Mag's Quick and Hlthy Low-Fat Cooking: Easy One-Dish Meals
- --------------------------------------------------------------------------------
117 PV Mag's Quick and Hlthy Low-Fat Cooking: Fabulous No-Guilt Desserts
- --------------------------------------------------------------------------------
118 PV Mag's Quick and Hlthy Low-Fat Cooking: Healthy Home Cooking
- --------------------------------------------------------------------------------
119 PV Mag's Quick and Hlthy Low-Fat Cooking: Healthy Italian Cooking
- --------------------------------------------------------------------------------
120 PV Mag's Quick and Hlthy Low-Fat Cooking: Light Ways with Poultry
- --------------------------------------------------------------------------------
121 PV Mag's Quick and Hlthy Low-Fat Cooking: Pastas and Sauces
- --------------------------------------------------------------------------------
122 Prevention's Freezer Cookbook
- --------------------------------------------------------------------------------
123 Prevention's Healing With Vitamins
- --------------------------------------------------------------------------------
124 Prevention's Health Guaranteed Cookbook
- --------------------------------------------------------------------------------
125 Prevention's Healthy One-Dish Meals in Minutes
- --------------------------------------------------------------------------------
126 Prevention's Healthy Weeknight Meals in Minutes
- --------------------------------------------------------------------------------
127 Prevention's Low-Fat, Low-Cost Cookbook
- --------------------------------------------------------------------------------
128 Prevention's Low-Fat Italian Favorites
- --------------------------------------------------------------------------------
129 Prevention's New Foods for Healing
- --------------------------------------------------------------------------------
130 Prevention's Q&H Low-Fat Cooking: Featuring All-American Food
- --------------------------------------------------------------------------------
131 Prevention's Q&H Low-Fat Cooking: Featuring Healthy Cuisines from the
Mediterranean
- --------------------------------------------------------------------------------
132 Prevention's Q&H Low-Fat Cooking: From Entertaining to Everyday, Over 200
Delicious Recipes
- --------------------------------------------------------------------------------
133 Prevention's Stop Dieting and Lose Weight Cookbook
- --------------------------------------------------------------------------------
134 Prevention's The Healthy Cook
- --------------------------------------------------------------------------------
135 Prevention's Your Perfect Weight
- --------------------------------------------------------------------------------
136 Principles of Running, The
- --------------------------------------------------------------------------------
137 Renewal
- --------------------------------------------------------------------------------
139 Run-Fast
- --------------------------------------------------------------------------------
139 Runners Book of Training Secrets, The
- --------------------------------------------------------------------------------
140 Running to Win
- --------------------------------------------------------------------------------
<PAGE>
Page 6 of 6
Schedule A
Rodale Inc. & Mothernature.com
Summary of Rodale titles
Title
- --------------------------------------------------------------------------------
141 Runner's World Complete Book of Running
- --------------------------------------------------------------------------------
142 Running Injury Free
- --------------------------------------------------------------------------------
143 Scott Tinley's Winning Guide to Sports Endurance
- --------------------------------------------------------------------------------
144 Sex: A Man's Guide
- --------------------------------------------------------------------------------
145 Steven Raichlen's Healthy Latin Cooking
- --------------------------------------------------------------------------------
146 Steven Raichlen's Healthy Latin Cooking (Spanish Edition)
- --------------------------------------------------------------------------------
147 Stress Remedies
- --------------------------------------------------------------------------------
148 Symptoms: Their Causes and Cures (English Edition)
- --------------------------------------------------------------------------------
149 Symptoms: Their Causes and Cures (Spanish Edition)
- --------------------------------------------------------------------------------
150 Total Health for Men
- --------------------------------------------------------------------------------
151 Total Health for Women
- --------------------------------------------------------------------------------
152 Trailside's Hints and Tips for Outdoor Adventure
- --------------------------------------------------------------------------------
153 Trailside's Trail Food
- --------------------------------------------------------------------------------
154 Visual Encyclopedia of Natural Healing, The
- --------------------------------------------------------------------------------
155 When a Man Turns Forty
- --------------------------------------------------------------------------------
156 Woman's Book of Healing Herbs, The
- --------------------------------------------------------------------------------
157 Women's Encyclopedia of Health and Emotional Healing (Spanish Edition)
- --------------------------------------------------------------------------------
158 Yoga of the Heart
- --------------------------------------------------------------------------------
159 Young Skin for Life
- --------------------------------------------------------------------------------
160 Your Family Will Love It! Cookbook
- --------------------------------------------------------------------------------
<PAGE>
MOTHERNATURE.COM, INC.
As of September 17, 1999
To: Rodale Inc. (the "Purchaser")
Re: Purchase of Common Stock
Ladies and Gentlemen:
MotherNature.com, Inc., a Delaware corporation (the "Company"), hereby
agrees with you as follows:
ARTICLE I
PURCHASE, SALE AND TERMS OF THE SHARES
1.01. The Shares. The Company has authorized the issuance and sale of
--- ------
7,269,285 shares (the "Shares") of authorized but unissued shares of Common
Stock, $.01 par value per share (the "Common Stock"), to the Purchaser.
1.02. Purchase and Sale of the Shares.
-------- --- ---- -- --- ------
(a) The Closing. The Company agrees to issue and sell to the Purchaser,
-----------
and, subject to and in reliance upon the representations, warranties, terms and
conditions of this Agreement, the Purchaser agrees to purchase, the Shares for
the consideration (the "Consideration") described in subsection (b) below. Such
purchase and sale shall take place at a closing (the "Closing") to be held at
the offices of Testa, Hurwitz & Thibeault, LLP, High Street Tower, 125 High
Street, Boston, Massachusetts, no later than 5 business days after the
satisfaction or (subject to applicable law) waiver of the conditions set forth
in Articles III and IIIA (excluding conditions that by their terms cannot be
satisfied until the Closing), or on such other date and at such time as may be
mutually agreed upon between the Company and the Purchaser. At the Closing, the
Company will issue and deliver a certificate evidencing the Shares sold at the
Closing, against payment of the full purchase price therefor by the delivery by
the Purchaser of the Consideration.
(b) Consideration. The Consideration for the Shares shall be the license
-------------
and marketing agreements set forth in a certain Content License and Marketing
Agreement between the Company and the Purchaser (the "License Agreement"), such
License Agreement to be in the form attached as Exhibit 1.02(a) hereto. The
---------------
Company and the Purchaser agree that a portion of the value of such
Consideration shall be allocated to various intangible assets which are expected
to be amortized over periods not to exceed the term of the License Agreement and
the rights granted thereunder.
<PAGE>
-2-
ARTICLE II
REPRESENTATIONS BY THE PURCHASER
The Purchaser represents that: (a) it will acquire the Shares to be
acquired by it for its own account and that such Shares are being and will be
acquired by it for the purpose of investment and not with a view to distribution
or resale thereof; subject, nevertheless, to the condition that the disposition
---------------------
of the property of the Purchaser shall at all times be within its control; (b)
the execution of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary action (if any)
on the part of the Purchaser, and this Agreement has been duly executed and
delivered, and constitutes a valid, legal, binding and enforceable agreement of
the Purchaser; (c) it is an "accredited investor" within the meaning of Rule 501
of Regulation D promulgated under the Securities Act; (d) it is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act;
and (e) it has taken no action which would give rise to any claim by any other
person for any other person for any brokerage commissions, finders' fees or the
like relating to this Agreement or the transaction contemplated hereby. The
acquisition by the Purchaser of the Shares shall constitute a confirmation of
the representations and warranties made by the Purchaser. The Purchaser further
represents that it understands and agrees that, until registered under the
Securities Act or transferred pursuant to the provisions of Rule 144 as
promulgated by the Securities and Exchange Commission, all certificates
evidencing any of the Shares, whether upon initial issuance or upon any transfer
thereof, shall bear a legend, prominently stamped or printed thereon, reading
substantially as follows:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 or applicable state
securities laws. These securities have been acquired for investment
and not with a view to distribution or resale, and may not be
mortgaged, pledged, hypothecated or otherwise transferred without an
effective registration statement for such securities under the
Securities Act of 1933 and applicable state securities laws, or the
availability of an exemption from the registration provisions of the
Securities Act of 1933 and applicable state securities laws."
The Purchaser further hereby represents, warrants and covenants to the
Company with respect to its purchase of the Shares hereunder as follows:
(a) Purchaser acknowledges that in purchasing the Shares it must be
prepared to continue to bear the economic risk of such investment for an
indefinite period of time because the Shares have not been registered under the
Securities Act and cannot be sold unless they are subsequently registered under
the Securities Act and applicable state laws, or unless exemptions from such
registrations are available.
<PAGE>
-3-
(b) Purchaser is able to bear the economic risk of an investment in the
Shares and, at the present time, could afford a complete loss of such
investment.
(c) Purchaser acknowledges that it and its attorneys, accountants and other
advisers and representatives have reviewed and analyzed this Agreement, have
been offered the opportunity to review the documents related thereto, and have
been offered access to such other information relevant to an investment in the
Shares as they have desired. Purchaser acknowledges that it and its attorneys,
accountants and other advisers and representatives have had an opportunity to
ask questions of, and receive answers from, a person acting on behalf of the
Company concerning such investment and that all such questions have been
answered to the full satisfaction of the Purchaser and such attorneys,
accountants, advisers and representatives.
(d) Purchaser acknowledges that the Shares have not been registered under
the Securities Act in reliance upon exemptions therefrom provided by Regulation
D, and understands that the Shares have not been approved or disapproved by the
Securities and Exchange Commission or any other Federal or state agency.
(e) Purchaser has the requisite knowledge and experience in financial and
business matters to be capable of evaluating the merits and risks of an
investment in the Shares and has evaluated the risk of investing in the Shares.
(f) The foregoing representations, warranties, agreements, undertakings and
acknowledgments are made by the Purchaser, and the information furnished herein
has been so furnished with the intent that the same will be relied upon by the
Company in determining Purchaser's suitability as a purchaser of the Shares and
such representations, warranties, agreements, undertakings, acknowledgments and
information will be true and accurate in all material respects as of, and the
Purchaser acknowledges that such representations and warranties shall survive,
the Closing and the purchase of the Shares by the Purchaser. The Purchaser
undertakes to notify the Company immediately of any change in any
representation, warranty or other information relating to it set forth herein
prior to the Closing.
ARTICLE III
CONDITIONS TO PURCHASER'S OBLIGATIONS'
The obligation of the Purchaser to purchase and pay for the Shares at the
Closing is subject to the following conditions:
3.01. Representations and Warranties. Each of the representations and
------------------------------
warranties of the Company set forth in Article IV hereof shall be true as of the
date hereof.
3.02. Documentation at Closing. The Purchaser shall have received prior
------------------------
to or at the Closing all of the following, each in form and substance
satisfactory to the Purchaser and its counsel, and all of the following events
shall have occurred prior to or simultaneous with the Closing to the
satisfaction of the Purchaser:
<PAGE>
-4-
(a) A copy of all charter documents of the Company certified by the
Secretary of State of the State of Delaware, a certified copy of the resolutions
of the Board of Directors and, if required, the stockholders of the Company,
evidencing approval of this Agreement, the Transaction Documents (as defined
below), the authorization for issuance, sale and delivery of the Shares, and
other matters contemplated hereby, certified copy of the By-laws of the Company,
and certified copies of all documents evidencing other necessary corporate or
other action and governmental approvals, if any, with respect to this Agreement
and issuance of the Shares.
(b) A certificate of the Secretary or an Assistant Secretary of the Company
stating the names of the officers of the Company authorized to sign this
Agreement, the certificates for the Shares, and the other documents or
certificates to be delivered pursuant to this Agreement by the Company or any of
its officers, together with the true signatures of such officers. The Purchaser
may conclusively rely on such certificate until it shall receive a further
certificate of the Secretary or Assistant Secretary of the Company canceling or
amending the prior certificate and submitting the signatures of the officers
named in such further certificate.
(c) A certificate from the President or Treasurer of the Company stating
that the representations and warranties of the Company contained in Article IV
hereof and otherwise made by the Company in writing in connection with the
transactions contemplated hereby were true and correct as of the date hereof and
that all conditions required to be performed by the Company prior to or at such
Closing have been performed.
(d) An Instrument of Accession to the Second Amended and Restated
Stockholders Agreement, in the form set forth in Exhibit 3.02(d) (the
---------------
"Instrument of Accession"), shall have been executed by the Purchaser and the
Company.
(e) Amendment No. 1 to the Second Amended and Restated Registration Rights
Agreement, in the form set forth in Exhibit 3.02(e), shall have been executed by
---------------
the parties named therein (the "Amendment No. 1"; the Second Amended and
Restated Registration Rights Agreement, as amended by Amendment No. 1, is
referred to herein as the "Registration Rights Agreement"; Amendment No. 1,
together with this Agreement and the Instrument of Accession, the "Transaction
Documents").
(f) The License Agreement shall have been executed and delivered by the
Purchaser and the Company.
(g) A Certificate of Amendment to the Certificate of Incorporation of the
Company providing for the authorization of the Shares (the "Charter Amendment")
shall have been filed with the Secretary of State of the State of Delaware.
(h) Certificates of Good Standing of the Company from the State of
Delaware, the Commonwealth of Pennsylvania, and the Commonwealth of
Massachusetts.
<PAGE>
-5-
3.03. Consents, Waivers, etc. Prior to the Closing, the Company shall have
----------------------
obtained all consents or waivers, if any, necessary to execute and deliver this
Agreement, execute and deliver the Transaction Documents and the License
Agreement, issue the Shares and carry out the transactions contemplated hereby
and thereby, and all such consents and waivers shall be in full force and
effect. All corporate and other action and governmental filings necessary to
effectuate the terms of this Agreement, the Shares and other agreements and
instruments executed and delivered by the Company in connection herewith shall
have been made or taken, except for any post-sale filing that may be required
under federal and state securities laws. All authorizations, approvals or
permits, if any, of any governmental authority or regulatory body of the United
States or of any state that are required in connection with the lawful issuance
and sale of the Shares pursuant to this Agreement shall be obtained and
effective as of the Closing. In addition to the documents set forth above, the
Company shall have provided the Purchaser with any other information or copies
of documents that it may reasonably request.
ARTICLE IIIA
CONDITIONS TO THE COMPANY'S OBLIGATIONS
The obligation of the Company to issue and sell the Shares at the Closing
is subject to the following conditions:
3A.01. Representations and Warranties. Each of the representations and
------------------------------
warranties of the Purchaser set forth in Article II hereof shall be true on the
date hereof and as of such Closing.
3A.02. Documentation at Closing. The Company shall have received prior
------------------------
to or at the Closing the following, each in form and substance satisfactory to
the Company and its counsel, and all of the following events shall have occurred
prior to or simultaneous with the Closing to the satisfaction of the Company:
(a) The Instrument of Accession shall have been executed by the Purchaser
and the Company.
(b) The License Agreement shall have been executed and delivered by the
Purchaser and the Company.
(c) The Charter Amendment shall have been filed with the Secretary of
State of the State of Delaware.
(d) A Lock-up Agreement, substantially in the form of Exhibit 3A.02(d)
----------------
hereto, shall have been executed and delivered by the Purchaser.
(e) A Waiver of Registration Rights, substantially in the form of
Exhibit 3A.02(e) hereto, shall have been executed and delivered by the
----------------
Purchaser.
<PAGE>
-6-
3A.03. Qualifications. All authorizations, approvals, or permits, if
---------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants as follows and except as
set forth in the Disclosure Schedule attached hereto as Schedule IV:
4.01. Organization and Standing of the Company. The Company is a
-----------------------------------------
duly organized and validly existing corporation in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority for
the ownership and operation of properties and for the carrying on of its
business as now conducted and as now proposed to be conducted. The Company is
duly licensed or qualified and in good standing as a foreign corporation
authorized to do business in all jurisdictions in which the character of the
property owned or leased, or the nature of the activities conducted, by it makes
such licensing or qualification necessary and in which failure to qualify would
have a material adverse effect upon the Company. The Company has no
subsidiaries and does not own or control, directly or indirectly, any shares of
capital stock of any other corporation or any interest in any partnership, joint
venture or other non-corporate business enterprise.
4.02. Corporate Action. Except as set forth on Schedule 4.02, the
----------------- -------------
Company has all necessary corporate power and has taken all corporate action
required to make all the provisions of this Agreement, the Shares and any other
agreements and instruments executed in connection herewith and therewith the
valid and enforceable obligations they purport to be. The issuance of the
Shares is not subject to preemptive or other preferential rights, or similar
statutory or contractual rights, either arising pursuant to any agreement or
instrument to which the Company is a party or which are otherwise binding upon
the Company which have not been waived.
4.03. Governmental Approvals. Except as set forth on
-----------------------
Schedule 4.03, no authorization, consent, approval, license, exemption of or
- -------------
filing or registration with any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, is or will be
necessary for, or in connection with, the offer, issuance or sale of the Shares
or the execution or delivery by the Company of, or for the performance by it of
its obligations under, the Transaction Documents and any other agreements or
instruments executed in connection herewith or therewith.
4.04. Litigation. Except as set forth on Schedule 4.04, there is no
----------- -------------
litigation or governmental proceeding or investigation pending or, to the
knowledge of the Company threatened against the Company, affecting any of its
properties or assets, or, to the knowledge of the Company, against any officer
of the Company that might result, either in any case or in the aggregate, in any
material adverse change in the business, operations, affairs or conditions of
the
<PAGE>
-7-
Company, or any of its properties or assets, or that might call into question
the validity of this Agreement, any of the Transaction Documents, any of the
Shares, or any action taken or to be taken pursuant hereto. Neither the Company
nor, to the knowledge of the Company, any executive officer of the Company, is
in default with respect to any order, writ, injunction, decree, ruling or
decision of any court, commission, board or other government agency that might
result, either in any case or in the aggregate, in any material adverse change
in the business, operations, affairs or conditions of the Company or any of its
properties or assets. The foregoing sentences include, without limiting their
generality, actions pending or threatened (or any basis therefor known to the
Company) involving the prior employment of employees of the Company or use in
the Company's business of any information or techniques allegedly proprietary to
any of their former employers.
4.05. Compliance with Other Instruments. The Company is in
----------------------------------
compliance in all respects with the terms and provisions of this Agreement and
of its Certificate of Incorporation, as amended, and By-laws and, except as set
forth on Schedule 4.05, in all material respects with the terms and provisions
-------------
of each mortgage, indenture, lease, agreement and other instrument relating to
obligations of the Company and, of all judgments, decrees, governmental orders,
statutes, rules or regulations by which it is bound or to which its properties
or assets are subject, the violation of which would have a material adverse
effect on the business, assets or financial condition of the Company. Neither
the execution and delivery of the Transaction Documents nor the issuance of the
Shares, nor the consummation of any transaction contemplated hereby or thereby,
has constituted or resulted in or will constitute or result in a default or
violation of any term or provision in any of the foregoing documents or
instruments, the result of which default or violation would have a material
adverse effect on the business, assets or financial condition of the Company.
4.06. Transactions with Affiliates. Except as contemplated by this
-----------------------------
Agreement the Registration Rights Agreement, the Second Amended and Restated
Stockholders Agreement, and except as set forth in Schedule 4.06, there are no
-------------
loans, leases, royalty agreements or other continuing transactions between the
Company and any of the customers or suppliers of the Company, and any officer or
director of the Company, and any Person, other than the Purchaser, owning one
percent (1%) or more of any class of capital stock of the Company or any member
of such stockholder's family or any corporation or other entity controlled by
such stockholder or a member of such stockholder's family.
4.07. Assumptions or Guaranties of Indebtedness of Other Persons.
-----------------------------------------------------------
The Company has not assumed, guaranteed, endorsed or otherwise become directly
or contingently liable on (including, without limitation, liability by way of
agreement, contingent or otherwise, to purchase, to provide funds for payment,
to supply funds to or otherwise invest in the debtor or otherwise to assure the
creditor against loss) any Indebtedness of any other Person.
4.08. Investments in Other Persons. Other than advances to
-----------------------------
employees in the ordinary course of business, the Company has not made any loan
or advance to any Person that is outstanding on the date of this Agreement, and
the Company is not obligated or committed to
<PAGE>
-8-
make any such loan or advance, nor does the Company own any capital stock,
assets comprising the business of, obligations of, or any interest in, any
Person.
4.09. Registration Rights. Except as set forth in the Registration
--------------------
Rights Agreement, no Person has demand or other rights to cause the Company to
file any registration statement under the Securities Act relating to any
securities of the Company or any right to participate in any such registration
statement.
4.10. Securities Act of 1933. The Company has complied and will
-----------------------
comply with all applicable federal or state securities laws in connection with
the issuance and sale of the Shares. Neither the Company nor anyone acting on
its behalf has offered or will offer to sell the Shares or similar securities
to, or solicit offers with respect thereto from, or enter into any preliminary
conversations or negotiations relating thereto with, any Person, so as to bring
the issuance and sale of the Shares under the registration provisions of the
Securities Act.
4.11. Agreements, Contracts and Commitments. Except for the License
--------------------------------------
Agreement and as set forth in Schedule 4.11 attached hereto, the Company is not
-------------
a party to or is bound by:
(a) any collective bargaining agreements;
(b) any bonus, deferred compensation, incentive compensation, pension,
profit-sharing or retirement plans, or any other employee benefit plans or
arrangements;
(c) any employment or consulting agreement, contract or commitment
with any officer or director level employee, not terminable by the Company on
thirty (30) days' notice without liability, except to the extent general
principles of wrongful termination law may limit the Company's ability to
terminate employees at will;
(d) any agreement of indemnification or guaranty not entered into in
the ordinary course of business other than indemnification agreements between
the Company or any of its subsidiaries and any of its officers or directors;
(e) any agreement, contract or commitment containing any covenant
limiting the freedom of the Company to engage in any line of business or compete
with any person;
(f) any agreement, contract or commitment relating to capital
expenditures and involving future obligations in excess of $50,000 and not
cancelable without penalty;
(g) any agreement, contract or commitment currently in force relating
to the disposition or acquisition of assets not in the ordinary course of
business or any ownership interest in any corporation, partnership, joint
venture or other business enterprise;
(h) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing of money
or extension of credit;
(i) any joint marketing or development agreement;
<PAGE>
-9-
(j) any distribution agreement (identifying any that contain
exclusivity provisions); or
(k) any other agreement, contract or commitment (excluding real and
personal property leases) which involve payment by the Company under any such
agreement, contract or commitment of $50,000 or more in the aggregate and is not
cancelable without penalty within thirty (30) days.
Neither the Company, nor to the Company's knowledge any other party to a
Company Contract (as defined below), has breached, violated or defaulted under,
or received notice that it has breached, violated or defaulted under, any of the
material terms or conditions of any of the agreements, contracts or commitments
to which the Company is a party or by which it is bound of the type described in
clauses (a) through (k) above (any such agreement, contract or commitment, a
"Company Contract") in such manner as would permit any other party to cancel or
terminate any such Company Contract, or would permit any other party to seek
damages, which would have a material adverse effect on the business, financial
condition or affairs of the Company.
4.12. No Brokers or Finders. No Person has or will have, as a
----------------------
result of the transactions contemplated by this Agreement, any right, interest
or valid claim against or upon the Company for any commission, fee or other
compensation as a finder or broker because of any act or omission by the Company
or any agent of the Company; and the Company agrees to indemnify and hold the
Purchaser harmless against any such commissions, fees or other compensation.
4.13. Capitalization; Status of Capital Stock. Immediately prior
----------------------------------------
to the Closing, the Company had a total authorized capitalization consisting of
(i) 93,300,000 shares of Common Stock, of which 6,951,630 shares were issued and
outstanding, and (ii) 67,588,911 shares of preferred stock, of which (w)
23,811,358 shares are designated as Series A Convertible Preferred Stock,
23,316,097 of which were issued and outstanding, (x) 23,019,375 shares are
designated as Series B-1 Convertible Preferred Stock, of which 23,019,375 were
issued and outstanding, (y) 1,800,000 shares are designated as Series B-2
Convertible Preferred Stock, of which none were issued and outstanding, and (z)
18,958,178 shares are designated as Series C Convertible Preferred Stock, of
which 18,409,629 were issued and outstanding. All of the outstanding shares of
capital stock of the Company are duly authorized, validly issued and fully paid
and nonassessable. The Shares, when issued and delivered in accordance with the
terms hereof, will be duly authorized, validly issued and fully paid and
nonassessable. Except as disclosed in Schedule 4.13, there are no options,
-------------
warrants or rights to purchase shares of capital stock or other securities
authorized, issued or outstanding, nor is the Company obligated in any other
manner to issue shares of its capital stock or other securities, except as
contemplated herein. Except as set forth in Schedule 4.13 hereto and in the
-------------
Second Amended and Restated Stockholders Agreement and the Registration Rights
Agreement, to the Company's knowledge, there are no restrictions on the transfer
of the Shares other than those imposed by relevant state and federal securities
laws. Except as set forth herein and in the Second Amended and Restated
Stockholders Agreement, no holder of any security of the Company is entitled to
preemptive or similar statutory or contractual
<PAGE>
-10-
rights, either arising pursuant to any agreement or instrument to which the
Company is a party or that are otherwise binding upon the Company.
4.14. Taxes. Except as set forth on Schedule 4.14, the Company has
----- -------------
completely and correctly prepared and timely filed all federal, state, foreign
and other tax returns required under the laws of any applicable jurisdiction to
be filed by it, has paid or made provision for the payment of all taxes due from
the Company, and all additional assessments (whether or not shown on such
returns), and adequate provisions have been made and are reflected in the
Company's financial statements for all current taxes and other charges to which
the Company is subject and which are not currently due and payable. None of the
federal income tax returns of the Company have been audited by the Internal
Revenue Service. The Company does not know of any additional assessments or
adjustments pending or threatened against the Company for any period, nor of any
basis for any such assessment or adjustment.
4.15. Title to Assets. The Company has good and marketable title
----------------
in fee to such of its fixed assets, if any, as are real property, and good and
merchantable title to all of its other material assets, free of any mortgages,
pledges, charges, liens, security interests or other encumbrances, except those
indicated in Schedule 4.15. The Company enjoys peaceful and undisturbed
-------------
possession under all leases under which it is operating, and all said leases are
valid and subsisting and in full force and effect.
4.16 Financial Statements. The Company has furnished to the
--------------------
Purchaser (i) the unaudited balance sheet of the Company as of June 30, 1999 and
the related unaudited statement of income and stockholder's equity of the
Company for the six-month period ended June 30, 1999, and (ii) the audited
balance sheet of the Company as of December 31, 1997 and 1998 and the related
unaudited statement of income, stockholder's equity and cash flows of the
Company for the years ended December 31, 1996, 1997 and 1998 (collectively, the
"Financial Statements"). All such Financial Statements fairly present the
financial position of the Company as of the dates thereof, it being understood
that any such unaudited Financial Statements do not contain any footnotes and
are subject to year-end audit adjustments. Except as set forth on
Schedule 4.16, since June 30, 1999, there has been no change in the assets,
- -------------
liabilities or financial condition of the Company from that reflected in the
Financial Statements as of such date except for changes in the ordinary course
of business which in the aggregate have not had a material adverse effect on the
business, operations, or financial condition of the Company.
4.17. Intellectual Property .
---------------------
(a) Except as set forth on Schedule 4.17(a) hereto, to the Company's
----------------
knowledge, after due inquiry, the Company owns, free and clear of all security
interests, or has the valid right to use all Intellectual Property (as defined
below in this Section 4.17) necessary to its business as currently conducted.
No other person or entity (other than licensors of software that is generally
commercially available, licensors of Intellectual Property under the agreements
disclosed pursuant to paragraph (d) below and non-exclusive licensees of the
Company's Intellectual Property in the ordinary course of the Company's
business) has any rights to any of the Intellectual Property owned by the
Company, and, to the Company's knowledge, no other
<PAGE>
-11-
person or entity is infringing, violating or misappropriating any of the
Intellectual Property that the Company owns. For purposes of this Agreement,
"Intellectual Property" means all (i) patents, patent applications, patent
disclosures and all related continuation, continuation-in-part, divisional,
reissue, reexamination, utility model, certificate of invention and design
patents, patent applications, registrations and applications for registrations,
(ii) trademarks, service marks, trade dress, logos, trade names and corporate
names and registrations and applications for registration thereof, (iii)
copyrights and registrations and applications for registration thereof, (iv)
computer software (in both source code and object code form), data and
documentation, (v) trade secrets and confidential business information, whether
patentable or unpatentable and whether or not reduced to practice, know-how,
manufacturing and production processes and techniques, research and development
information, copyrightable works, financial marketing and business data, pricing
and cost information, business and marketing plans and customer and supplier
lists and information, (vi) domain name registrations, and (vii) other
proprietary rights relating to any of the foregoing.
(b) Except as set forth on Schedule 4.17(b) hereto, to the Company's
----------------
knowledge, none of the activities or business conducted by the Company
infringes, violates or constitutes a misappropriation of (or in the past
infringed, violated or constituted a misappropriation of) any Intellectual
Property of any other person or entity which materially adversely affects or, so
far as the Company may now foresee, in the future is reasonably likely to result
in or have a material adverse effect on the business, operations, affairs or
conditions of the Company or any of its properties or assets. The Company has
not received any complaint, claim or notice alleging any such infringement,
violation or misappropriation, and to the knowledge of the Company, there is no
valid basis for any such complaint, claim or notice.
(c) Schedule 4.17(c) hereto identifies each (i) patent that has been
----------------
issued or assigned to the Company with respect to any of its Intellectual
Property, (ii) pending patent application that the Company has made with respect
to any of its Intellectual Property, (iii) any copyright or trademark
registration or application with respect to the Company's Intellectual Property,
(iv) domain name registrations, and (v) license or other agreements pursuant to
which the Company has granted any rights to any third party with respect to any
of its Intellectual Property.
(d) Schedule 4.17(d) hereto identifies each agreement with a third
----------------
party pursuant to which the Company obtains rights to Intellectual Property
material to the business of the Company (other than software that is generally
commercially available) that is owned by a party other than the Company. Other
than license fees for software that is generally commercially available, the
Company is not obligated to pay any royalties or other compensation to any third
party in respect of its ownership, use or license of any of its Intellectual
Property.
(e) The Company has taken reasonable precautions (i) to protect its
rights in its Intellectual Property and (ii) to maintain the confidentiality of
its trade secrets, know-how and other confidential Intellectual Property, and to
the Company's knowledge, there have been no acts or omissions (other than those
made based on reasonable, good faith business decisions) by the officers,
directors, shareholders and employees of the Company the result of which would
be
<PAGE>
-12-
to materially compromise the rights of the Company to apply for or enforce
appropriate legal protection of the Company's Intellectual Property.
4.18. Insurance. The Company maintains valid policies of workers'
---------
compensation insurance and of insurance with respect to its properties and
business of the kinds and in the amounts not less than is customarily obtained
by corporations of established reputation engaged in the same or similar
business and similarly situated, including, without limitation, insurance
against loss, damage, fire, theft, public liability and other risks, except that
the Company does not carry products liability insurance.
4.19. Compliance. Except as disclosed on Schedule 4.19 attached
---------- -------------
hereto and with such exceptions as individually or in the aggregate would not
have a material adverse effect on the Company's business or condition, financial
or otherwise, the Company has, in all material respects, complied with all laws,
regulations and orders applicable to its present and proposed business and has
all material permits and licenses required thereby. To the Company's knowledge,
no employee of the Company is in violation of any term of any contract or
covenant (either with the Company or with another entity) relating to
employment, patents, assignment of inventions, proprietary information
disclosure, non-competition or non-solicitation.
4.20. ERISA. Except as disclosed on Schedule 4.20 hereto, the
----- -------------
Company does not have or otherwise contribute to or participate in any employee
benefit plan subject to the Employee Retirement Income Security Act of 1974, as
amended.
4.21. Books and Records. Except as disclosed on Schedule 4.21
------------------ -------------
hereto, the minute books of the Company contain complete records of all meetings
and other corporate actions of its stockholders and its Board of Directors and
committees thereof. Except as disclosed on Schedule 4.21 hereto, the stock
-------------
ledger of the Company is complete and reflects all issuances, transfers,
repurchases and cancellations of shares of capital stock of the Company.
4.22. Permits. Schedule 4.22 attached hereto sets forth a list of
------- -------------
all material permits, licenses, registrations, certificates, orders or approvals
("Permits") from any court, department, commission, board, bureau, agency or
instrumentality, domestic or foreign, issued to or held by the Company. Such
listed Permits are the only Permits that are required for the Company to conduct
its business as presently or proposed to be conducted, except for those the
absence of which would not have a material adverse effect on the business,
operations, affairs or conditions of the Company or any of its properties or
assets. Each such Permit is in full force and effect and, to the best of the
knowledge of the Company, no suspension or cancellation of such Permit is
threatened and there is no basis for believing that such Permit will not be
renewable upon expiration.
4.23. Disclosures. Except as set forth on Schedule 4.23 attached
----------- -------------
hereto, neither this Agreement nor any exhibit or schedule hereto, nor any
written report, certificate or instrument furnished to the Purchaser or its
counsel in connection with the transactions contemplated by this Agreement, when
read together, contains or will contain any untrue statement of a material fact
or omits or will omit to state a material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances under
which they were made, not misleading.
<PAGE>
-13-
ARTICLE V
COVENANTS OF THE COMPANY
5.01. Affirmative Covenants of the Company Other Than Reporting
---------------------------------------------------------
Requirements. Without limiting any other covenants and provisions hereof, the
- -------------
Company covenants and agrees that, until the earlier to occur of (i) the
consummation of an Initial Public Offering, or (ii) such time as the Purchaser
holds less than 25% of the Shares which were originally issued hereunder (as
adjusted for stock splits, stock dividends and the like), but subject to Section
5.03 herein, it will perform and observe the following covenants and provisions
and will cause each Subsidiary, if any, to perform and observe such of the
following covenants and provisions as are applicable to such Subsidiary:
(a) Payment of Taxes. Pay and discharge, and cause each Subsidiary
-----------------
to pay and discharge, all taxes, assessments and governmental charges or levies
imposed upon it or upon its income or profits or business, or upon any
properties belonging to it, prior to the date on which penalties attach thereto,
and all lawful claims, which, if unpaid, might become a lien or charge upon any
properties of the Company or any Subsidiary, provided that neither the Company
nor any Subsidiary shall be required to pay any such tax, assessment, charge,
levy or claim that is being contested in good faith and by appropriate
proceedings if the Company or Subsidiary concerned shall have set aside on its
books adequate reserves with respect thereto as shall be determined by its Board
of Directors.
(b) Maintenance of Insurance. Maintain, and cause each Subsidiary
-------------------------
to maintain, with responsible and reputable insurance companies or associations
insurance in such amounts and covering such risks as is usually carried by
companies of similar size engaged in similar businesses and owning similar
properties in the same general areas in which the Company or such Subsidiary
operates.
(c) Preservation of Corporate Existence. Preserve and maintain,
------------------------------------
and cause each Subsidiary to preserve and maintain, its corporate existence,
rights, franchises and privileges in the jurisdiction of its incorporation, and
qualify and remain qualified, and cause each Subsidiary to qualify and remain
qualified, as a foreign corporation in each jurisdiction in which such
qualification is necessary in view of its business and operations or the
ownership of its properties. Preserve and maintain, and cause each Subsidiary
to preserve and maintain, all material licenses and other rights to use patents,
processes, licenses, trademarks, trade names, inventions, intellectual property
rights or copyrights owned or possessed by it and reasonably necessary to the
conduct of its business.
(d) Compliance with Laws. Comply, and cause each Subsidiary to
---------------------
comply, in all material respects with all applicable laws, rules, regulations
and orders of any governmental authority, noncompliance with which could
materially adversely affect its business or condition, financial or otherwise,
except non-compliance being contested in good faith
<PAGE>
-14-
through appropriate proceedings so long as the Company shall have set up
sufficient reserves, if any, required under generally accepted accounting
principles with respect to such items.
(e) Keeping of Records and Books of Account. Keep, and cause each
----------------------------------------
Subsidiary to keep, adequate records and books of account, in which complete
entries will be made in accordance with generally accepted accounting principles
consistently applied, reflecting all financial transactions of the Company and
such Subsidiary, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection within its business shall be made.
(f) Maintenance of Properties, etc. Maintain and preserve, and
-------------------------------
cause each Subsidiary to maintain and preserve, all of its properties, necessary
or useful in the proper conduct of its business, in good repair, working order
and condition, ordinary wear and tear excepted and comply with material
provisions of all leases which are material to its business.
(g) Inspection. Permit, during normal business hours following
-----------
reasonable request and notice, the Purchaser, for so long as the Purchaser holds
at least 2,500,000 shares of Common Stock (as adjusted for stock splits, stock
dividends and the like), or any agents or representatives thereof, to examine
and make copies of and extracts from the records and books of account of, and
visit and inspect the properties of the Company and any Subsidiary, to discuss
the affairs, finances and accounts of the Company and any Subsidiary with any of
its executive officers, directors and independent accountants, and consult with
and advise the management of the Company and any Subsidiary as to their affairs,
finances and accounts, during normal business hours. The Purchaser agrees that
it will maintain the confidentiality of any information so obtained by it which
is not otherwise available from other sources.
(h) Budgets and Board Approval. Within thirty (30) days prior to
---------------------------
the commencement of each fiscal year, prepare and submit to, and obtain the
approval of a majority of, the Board of Directors of a budget for such fiscal
year, including projections of capital and operating expenses, cash flow, and
profits and losses, all itemized in reasonable detail and a business plan for
such fiscal year.
(i) Financings. Promptly, fully and in detail, inform the Board of
-----------
Directors in advance of any commitments or contracts relating to financing of
any material nature for the Company or pledge of corporate assets.
(j) Board of Directors. The Company shall use its best effort to
-------------------
ensure that meetings of its Board of Directors are held at least four (4) times
each year and at least once each quarter. The Board of Directors shall maintain
(i) a Compensation Committee of the Board of Directors consisting of two non-
management members of the Board, and (ii) an Audit Committee of the Board of
Directors, consisting of two non-management members of the Board, and which will
review the annual financial statements of the Company with the Company's
independent auditors. The Company will promptly pay all direct out-of-pocket
expenses reasonably incurred by each director of the Company in attending each
meeting of the Board of Directors or any committee thereof.
<PAGE>
-15-
(k) Observer Rights. For so long as the Purchaser holds at least
----------------
two percent (2%) of the fully diluted capital stock of the Company and does not
have a nominee on the Company's Board of Directors, the Purchaser shall have a
right to attend each meeting of the Board of Directors of the Company and each
meeting of any committee thereof and to participate in all discussions during
each such meeting; provided, however, that the Purchaser shall be bound by the
-------- -------
confidentiality, non-disclosure and limitations on use provisions contained in
Section 5.01(g) hereof with respect to any information received at such meetings
and that the Company reserves the right to exclude the Purchaser from any
meeting or portion thereof if it determines in good faith that attendance by the
Purchaser could adversely affect the attorney-client privilege between the
Company and its counsel, or otherwise have a detrimental effect on the Company.
The Company shall send to the Purchaser the notice of the time and place of such
meeting in the same manner and at the same time as it shall send such notice to
its directors or committee members, as the case may be. The Company shall also
provide to the Purchaser and designee copies of all notices, reports, minutes
and consents at the time and in the manner as they are provided to the Board of
Directors or committee. The Company shall promptly pay all direct out-of pocket
transit expenses reasonably incurred by the Purchaser in attending each meeting
of the Board of Directors or any committee thereof.
(l) Employee Nondisclosure and Developments Agreements. The
---------------------------------------------------
Company shall use its best efforts to obtain, and shall cause its subsidiaries
to use their best efforts to obtain, an Employee Nondisclosure and Developments
Agreement, from all officers, key employees and other employees who will have
access to confidential information of the Company or any of its subsidiaries,
upon their employment by the Company or any of its Subsidiaries.
(m) By-laws. The Company shall at all times cause its By-laws to
--------
provide that, unless otherwise required by the laws of the State of Delaware,
any two directors shall have the right to call a meeting of the Board of
Directors or stockholders. The Company shall at all times maintain provisions
in its By-laws or Certificate of Incorporation, as amended, indemnifying all
directors and officers against liability to the maximum extent permitted under
the laws of the State of Delaware.
(n) Use of Proceeds. The Company shall use the proceeds from the
----------------
sale of the Shares issued hereunder for implementation of the License Agreement
and for working capital and other general corporate purposes.
5.02. Reporting Requirements. Until the consummation of an Initial
-----------------------
Public Offering, but subject to Section 5.03, the Company will furnish the
following to the Purchaser for so long as the Purchaser holds at least two
percent (2%) of the fully diluted capital stock of the Company:
(a) as soon as available and in any event within thirty (30) days
after the end of each fiscal month of the Company, Consolidated balance sheets
of the Company and its Subsidiaries as of the end of such month and Consolidated
statements of income and retained
<PAGE>
-16-
earnings and of changes in financial position of the Company and its
Subsidiaries for the period ending with such month, setting forth in each case
in comparative form the corresponding figures for the corresponding period of
the prior fiscal year, and compared against results projected in the applicable
business plan or budget all in reasonable detail prepared in accordance with
generally accepted accounting principles consistently applied.
(b) as soon as available and in any event within forty-five (45) days
after the end of each fiscal quarter of the Company, Consolidated balance sheets
of the Company and its Subsidiaries as of the end of such quarter and
Consolidated statements of income and retained earnings and of changes in
financial position of the Company and its Subsidiaries for the period ending
with such quarter, setting forth in each case in comparative form the
corresponding figures for the corresponding period of the prior fiscal year all
in reasonable detail prepared in accordance with generally accepted accounting
principles consistently applied.
(c) as soon as available and in any event within ninety (90) days
after the end of each fiscal year of the Company, a copy of the annual audit
report for such year for the Company and its Subsidiaries, including therein
Consolidated and consolidating balance sheets of the Company and its
Subsidiaries as of the end of such fiscal year and Consolidated and
consolidating statements of income and retained earnings and of changes in
financial position of the Company and its Subsidiaries for such fiscal year,
setting forth in each case in comparative form the corresponding figures for the
preceding fiscal year, all duly certified by a nationally recognized independent
public accounting firm;
(d) as soon as available any written report submitted to the Company
by independent public accountants in connection with an annual or interim audit
of the books of the Company and its Subsidiaries made by such accountants;
(e) promptly after the commencement thereof, notice of all actions,
suits and proceedings before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, materially
affecting the Company and the Subsidiaries when considered as a whole of the
type described in Section 4.03 that are not fully covered by insurance as
described in Section 5.01(b);
(f) at least thirty (30) days prior to the commencement of each fiscal
year of the Company, a copy of the operating plan and budget and business plan
provided for in Section 5.01(h);
(g) promptly after sending, making available, or filing the same, all
reports and financial statements that the Company or any Subsidiary sends or
makes available to the stockholders of the Company or the Securities and
Exchange Commission; and
(h) all other information respecting the business, properties or the
condition or operations, financial or otherwise, of the Company or any of its
Subsidiaries that any Purchaser may from time to time reasonably request.
<PAGE>
-17-
5.03. Termination of Certain Rights. Notwithstanding the
------------------------------
provisions of the introductory paragraph of Section 5.01, the provisions of
Section 5.01(k) shall survive the consummation of an IPO, but shall remain
subject to all of the other terms and condition set forth therein;
provided, however, all of the provisions of Sections 5.01 and 5.02 shall
- -------- ------- ---
terminate at any time the Purchaser engages in any competitive activity
described in Section 11.2 of the License Agreement.
ARTICLE VI
DEFINITIONS AND ACCOUNTING TERMS
6.01. Certain Defined Terms. As used in this Agreement, the
----------------------
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Agreement" means this Stock Purchase Agreement as from time to time
amended and in effect between the parties, including all Exhibits and Schedules
hereto.
"Board of Directors" means the then present members of the Board of
Directors of the Company.
"Company" means and shall include MotherNature.com, Inc. and its
predecessors, successors and assigns.
"Common Shares" shall have the meaning assigned to that term in
Section 1.01.
"Common Stock" includes (a) the Company's Common Stock, $.01 par value
per share, as authorized on the date of this Agreement, (b) any other capital
stock of any class or classes (however designated) of the Company, authorized on
or after the date hereof, the holders of which shall have the right, without
limitation as to amount, either to all or to a share of the balance of current
dividends and liquidating dividends after the payment of dividends and
distributions on any shares entitled to preference, and the holders of which
shall ordinarily, in the absence of contingencies, be entitled to vote for the
election of a majority of directors of the Company (even though the right so to
vote has been suspended by the happening of such a contingency), and (c) any
other securities into which or for which any of the securities described in (a)
or (b) may be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.
"Consolidated" when used with reference to any term defined herein
mean that term as applied to the accounts of the Company and its Subsidiaries,
if any, consolidated in accordance with generally accepted accounting principles
after eliminating intercompany items and minority interests.
<PAGE>
-18-
"Exchange Act" means the Securities Exchange Act of 1934, or any
similar federal statute, and the rules and regulations of the Securities and
Exchange Commission (or of any other Federal Agency then administering the
Exchange Act) thereunder, all as the same shall be in effect at the time.
"Indebtedness" means all obligations, contingent and otherwise, which
should, in accordance with generally accepted accounting principles consistently
applied, be classified upon the obligor's balance sheet as liabilities,
excluding any liabilities in respect of deferred federal or state income taxes,
but in any event including, without limitation, liabilities secured by any
mortgage on property owned or acquired subject to such mortgage, whether or not
the liability secured thereby shall have been assumed.
"Initial Public Offering" means and includes the closing of a public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of Common Stock for the
account of the Company in which the aggregate price paid for such shares by the
public shall be at least $20,000,000.
"Second Amended and Restated Registration Rights Agreement" means that
certain Second Amended and Restated Registration Rights Agreement, dated as of
May 12, 1999, as amended as of July 26, 1999, entered into by the Company and
the persons listed in the signature pages thereto.
"Second Amended and Restated Stockholders Agreement" means that
certain Second Amended and Restated Stockholders Agreement, dated as of May 12,
1999, as amended as of July 26, 1999, entered into by the Company and the
persons listed in the signature pages thereto.
"Securities Act" means the Securities Act of 1933, or any similar
Federal statute, and the rules and regulations of the Securities and Exchange
Commission (or of any other Federal agency then administering the Securities
Act) thereunder, all as the same shall be in effect at the time.
"Subsidiary" or "Subsidiaries" means any corporation, 50% or more of
the outstanding voting stock of which shall at the time be owned by the Company
or by one or more Subsidiaries, or any other entity or enterprise, 50% or more
of the equity of which shall at the time be owned by the Company or by one or
more Subsidiaries.
"Wholly-Owned Subsidiary" or "Wholly-Owned Subsidiaries" means any
corporation, 100% of the outstanding voting stock of which shall at the time be
owned by the Company or by one or more Wholly-Owned Subsidiaries, or any other
entity or enterprise, 100% of the equity of which shall at the time be owned by
the Company or by one or more Wholly-Owned Subsidiaries.
6.02. Accounting Terms. All accounting terms not specifically
-----------------
defined herein shall be construed in accordance with generally accepted
accounting principles consistent with those applied in preparation of the
financial statements prepared by the Company, and all other financial data
submitted pursuant to this Agreement and all financial tests to be calculated in
<PAGE>
-19-
accordance with this Agreement shall be prepared and calculated in accordance
with such principles.
ARTICLE VII
MISCELLANEOUS
7.01. No Waiver; Cumulative Remedies. No failure or delay on the part
-------------------------------
of any Purchaser in exercising any right, power or remedy hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy hereunder. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
7.02. Amendments, Waivers and Consents. Any provision in this
---------------------------------
Agreement to the contrary notwithstanding, changes in or additions to this
Agreement may be made, and compliance with any covenant or provision herein or
therein set forth may be omitted or waived, if the Company and the Purchaser
agree in writing thereto. Any waiver or consent may be given subject to
satisfaction of conditions stated therein and any waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
7.03. Addresses for Notices, etc. All notices, requests, demands
---------------------------
and other communications provided for hereunder shall be in writing (including
telegraphic communication) and delivered to the applicable party at the
addresses indicated below:
to the Company:
MotherNature.com, Inc.
One Concord Farms
490 Virginia Road
Concord, MA 01742
Attn: Chief Financial Officer
with a copy to:
Howard S. Rosenblum, Esq.
Testa, Hurwitz & Thibeault, LLP
125 High Street
Boston, MA 02110
<PAGE>
-20-
If to the Purchaser:
Rodale Inc.
33 E. Minor Street
Emmaus, PA 18098
Attn: Chief Financial Officer
All such notices, requests, demands and other communications shall be
effective when delivered to the address as aforesaid.
7.04. Costs, Expenses and Taxes. Each party hereto shall bear its
--------------------------
own costs and expenses in connection with this Agreement and the other
agreements and transactions contemplated hereby. In addition, the Company shall
pay any and all stamp and other taxes payable or determined to be payable in
connection with the execution and delivery of this Agreement, the Shares issued
hereunder and other instruments and documents to be delivered hereunder or
thereunder and agrees to save the Purchaser harmless from and against any and
all liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes.
7.05. Binding Effect; Assignment. Except as otherwise explicitly
---------------------------
provided in this Agreement, this Agreement shall be binding upon and inure to
the benefit of the Company and the Purchaser and its respective successors and
assigns, except that the Company shall not have the right to assign its rights
hereunder or any interest herein without the prior written consent of the
Purchaser.
7.06. Survival of Representations and Warranties. All
-------------------------------------------
representations and warranties made in this Agreement, or any other instrument
or document delivered in connection herewith or therewith, shall survive the
execution and delivery hereof or thereof for a period of twelve months following
the Closing.
7.07. Severability. The invalidity or unenforceability of any
-------------
provision hereof shall in no way affect the validity or enforceability of any
other provision.
7.08. Governing Law. This Agreement shall be governed by, and
--------------
construed in accordance with, the General Corporation Law of the State of
Delaware as to matters within the scope thereof, and as to all other matters
shall be governed by, and construed in accordance with, the internal laws of the
Commonwealth of Massachusetts.
7.09. Headings. Article, Section and subsection headings in this
---------
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
7.10. Sealed Instrument. This Agreement is executed as an
------------------
instrument under seal.
<PAGE>
-21-
7.11. Counterparts. This Agreement may be executed in any number
-------------
of counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
7.12. Further Assurances. From and after the date of this
-------------------
Agreement, upon the request of the Purchaser, the Company and each Subsidiary
shall execute and deliver such instruments, documents and other writings as may
be necessary or desirable to confirm and carry out and to effectuate fully the
intent and purposes of this Agreement and the Securities.
7.13. Dispute Resolution. All disputes, controversies or claims
-------------------
relating to the validity, construction, performance or alleged violation of this
Agreement and any other instrument or agreement entered into in connection with
this Agreement (including, without limitation, the Transaction Documents) shall
be resolved by arbitration in accordance with the rules then in effect of the
American Arbitration Association, before a single arbitrator with experience in
the matters in dispute. All proceedings of the arbitration, including arguments
and briefs, shall be held in Boston, Massachusetts. At the beginning of the
arbitration hearing, each party shall submit to the arbitrator its proposed
award. The arbitrator shall take evidence directly from witnesses and documents
as presented by the disputing parties. All witnesses shall be made available
for cross-examination. The arbitrator shall select one of the proposed awards
as the award for the arbitration and shall render a written decision, stating
the arbitrator's reasons therefor. The arbitrator shall render the award within
six months of the request for arbitration, and such award shall be final and
binding upon the disputing parties. Judgment upon the award rendered by the
arbitrator may be entered in any court of record of competent jurisdiction where
application may be made to such court for a judicial acceptance of the award and
an order of enforcement, as the law of such jurisdiction may require or allow.
The costs and expenses of the arbitration, including reasonable attorneys' fees
of each of the parties, shall be borne by the party or parties (jointly and
severally) whose proposed award is not selected by the arbitrator. Unless
clearly prevented from doing so because of the nature of the dispute, each of
the parties shall continue performing their respective obligations under this
Agreement and any other instrument or agreement entered into in connection with
this Agreement pending resolution of the dispute in arbitration.
Notwithstanding the foregoing, nothing contained herein shall limit or prevent
any party from seeking to enforce its rights under this Agreement and under any
other instrument or agreement entered in connection with this Agreement
(including, without limitation, the Transaction Documents) by an action for
specific performance to the extent provided for therein.
7.14. Aggregation of Stock. All securities of the Company held or
---------------------
acquired by any affiliate of the Purchaser shall be aggregated with those held
or acquired by the Purchaser for the purpose of determining the availability of
or discharge of any rights of the Purchaser under this Agreement.
7.15. Stock Split. All share amounts in this Agreement shall be
------------
appropriately adjusted to reflect any stock split, stock dividend or the like,
should such event occur prior to the Closing.
7.16. Termination. This Agreement may be terminated and the
------------
transactions contemplated hereby may be abandoned at any time prior to the
Closing:
<PAGE>
-22-
(i) at any time by mutual written consent of the Company and the
Purchaser; or
(ii) by either party hereto if the Closing does not occur on or prior to
November 30, 1999, provided the failure of the Closing to occur by such date is
not the result of the failure of the party seeking to terminate this Agreement
to perform or fulfill any of its obligations hereunder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
-23-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
MOTHERNATURE.COM, INC.
By: /s/ Michael Barach
------------------------------------
Michael Barach
President and Chief Executive Officer
PURCHASER:
RODALE INC.
By: /s/ Kevin D. Senie
-----------------------------------
Name: Kevin D. Senie
---------------------------------
Title: V.P. and CFO
--------------------------------
<PAGE>
Exhibit 23.2
ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
Boston, Massachusetts
November 5, 1999 /s/ Arthur Andersen LLP
<PAGE>
Exhibit 99.1
After the reverse stock split discussed in Note 7 is effected, we expect to be
in a position to render the following report.
/s/ Arthur Andersen LLP
November 4, 1999
Report of Independent Public Accountants
To MotherNature.com, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
financial statements of MotherNature.com, Inc. included in this registration
statement and have issued our report thereon dated February 17, 1999, except as
to the eleventh paragraph of Note 7 which is as of . Our audit was made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in the accompanying index is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required
to be set forth therein in relation to the basic financial statements taken as
a whole.
Boston Massachusetts
February 17, 1999, except
as to the eleventh paragraph of Note 7
which is as of .
